Advantages and Disadvantages of Lease Financing

There are many advantages and  disadvantages of lease financing.  Let us learn them in detail :

 



Advantages of Lease Financing

 

a)    To Lessor

1)    Regular Income: The lease rental income is received by the Lessor for the lease period.  Thus, the Lessor gets regular and assured income.

 

2)    Ownership: The ownership of asset is not transferred to Lessee.  Lessee bears the risks and rewards related to the asset.

 

3)    Tax Benefit : The Lessor gets tax benefit by charging the depreciation of the leased asset.

 

4)    Profitability: The rate of return on lease rent is higher than the interest payable on financing the asset.  Thus, the leasing of asset is highly profitable.

 

5)    Growth Potential : Being the cost efficient financing, the leasing business has been growing. This may facilitate the business during the depression period.  Therefore, the growth potential of leasing may be higher than other financing business.

 

6)    Investment Recovery : The Lessor may recover investment through lease rentals.

 

b)    To Lessee

1)    Use of asset: The Lessee can use an asset by paying fixed rentals.  He need not spend large amount on the purchase of the asset.

 

2)    Tax benefits: The lease expenses are chargeable to profits, hence, the enterprise gets the tax benefits.

 

3)    Cheaper: The lease financing is cheaper than other sources of finance.

 

4)    Assistance: The technical support may be provided by the Lessor to the Lessee for the leased asset.

 

5)    Inflation friendly: The Lessee makes fixed payment in the form of lease rent.  The same fixed amount is paid when the cost of asset increases.  Thus, leasing is considered as inflation friendly.

 

6)    Ownership: The Lessor offers the Lessee to purchase the asset by paying less amount when the primary period expires.

 

Disadvantages of Lease Financing

 

a)    To Lessor

1)    Unprofitable in case of inflation: The lease rent is fixed, therefore, the Lessor gets the same amount even if the cost of asset increases.

 

2)    Double taxation: The tax burden is doubled.  At the time of buying the asset as well as at the time of leasing the asset.

 

3)    Greater chance of damage of asset: The asset may be used carelessly by the Lessee because the ownership of asset is not transferred.  Thus, the asset may not be usable after the expiry of primary period.

 

b)    To Lessee

1)    Compulsion: The lease can not be cancelled.  The Lessee is bound to make the payment of lease rent when the asset is not used by him/her.

2)    Ownership: The ownership is not transferred to Lessee.  He/she can not be the owner unless the asset is bought by him/her.

 

3)    Costly: The Lessee pay the lease rental as well as the incidental expenses related to the asset.  Therefore, the lease financing may be costlier than other financing.

 

4)    Understatement of asset: The lease asset is not shown in the Balance Sheet because Lessee is not the owner of asset.  This leads to understatement of the asset for the Lessee.

 

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