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Role Of Lease Finance

Lease financing is beneficial for the supplier of the equipment, the lesser and the lessee. The supplier of the equipment is paid in full at the beginning. The equipment is sold to the lesser, and apart from obligations under warranties, the supplier has no further financial concern about the asset.

The lesser invests funds by purchasing assets from suppliers and makes a return out of the lease payments form the lessee. The lessee gets the assets and pays the lease rentals or installments conveniently. Such payments are deductible from the profits of the year and, thus, the lessee saves on account of income tax.

Lease finance offers the following advantages to the lessee:

(i)    Use of Asset. The lessee gets the assets for productive purposes without any investment. Lease finance is a very convenient method to acquire an asset.

(ii)    Liquidity. The lessee can use the funds which would have been invested in the asset somewhere else. For example, he can meet the, working capital needs with those funds.

(iii)    Easy Finance. It is easy to get lease finance as compared to loans for financial institutions. Assets need not be mortgaged or hypothecated as they stand in the name of the lesser. The lessee also avoids the conditions imposed by the financial institutions on future financial decisions.

(iv)    Convenience.
Lease rentals could be matched with the expected cash flows of the lessee. Thus, it is convenient source of finance.

(v)    Tax Savings.
Lease rentals are a part of expenditure and so are deductible from taxable income of the lessee.

(vi)    Flexibility.
There is no rigidity in the amount of monthly rentals. The amount and schedule f rentals can be adjusted by the lesser to accommodate the genuine needs of the lessee.

(vii)    Risk. The risk of obsolescence of the asset due to technological changes is to be borne by the lessor.

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