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5 Forms of Financial Lease – With Definition

What is a finance lease? A finance lease is a type of lease. In which this finance company is usually the legal owner of the asset for the duration of the lease, and while the lessee not only has operational control over the asset, or has some share of the economic risks and returns. Changes in the valuation of the underlying asset. So this activity is known as a finance lease. Let us throw light on its 5 financial lease forms. Which is below.

What are the five types of leases?

#1. Sale and leaseback
#2. Leveraged Leasing
#3. Direct Leasing
#4. Straight Lease and Modified Lease
#5. Primary and Secondary Lease (Front End and Back End Lease)

#1. Sale and leaseback

This finance is a subpart of the lease. Under the sale and leaseback arrangement, a firm sells an asset to another party which in turn leases it back to the firm. And the property is generally sold at market price on the day. Thus, the firm receives on one hand the selling price in cash, and on the other hand, makes economic use of the assets sold.

The firm is obliged to pay the tenant from time to time the rent. The sale and leaseback arrangement is beneficial to both the lessee and the lessee. While the former provides tax benefits due to depreciation, the latter has immediate cash flow that improves its liquidity position.

In fact, such an arrangement is popular with companies experiencing a short-term liquidity crisis. (However, under this arrangement, assets are not physically exchanged, but all of this is only on record. It is nothing but a paper transaction. Sales and leaseback transactions for those assets Appropriate, which are not subject to depreciation, but appreciation, say, for example, land.

#2. Leveraged Leasing

This particular form of leasing has become very popular in recent years. And this is known as leveraged leasing. It is popular in financing “big-ticket” assets such as aircraft, oil spills, and railway-type equipment. Unlike the three types of leases mentioned earlier, the three parties are involved in the case of leveraged lease arrangements – Lessee, Lesser, and Lender.

And this leveraged leasing can be defined as a lease arrangement in which the lessee provides an equity portion (say 25%) of the cost of the leased asset and the balance of financing to third-party lenders. Less, the owner of the asset is entitled to the depreciation allowance associated with the asset.

#3. Direct Leasing

This A. firm acquires the use of any such asset. And which he does not already have. A direct lease can be arranged directly from the manufacturer supplier or through a leasing company. And in the first case, the manufacturer/supplier acts as the lessee himself, whereas in the second case the lessee arranges the purchase of the property for the leasing company [lessee] from the manufacturer or supplier. And it also enters into an agreement with the lessee. For the lease of property.

#4. Straight Lease and Modified Lease

This direct lease requires the lessee to pay the lease rent over the expected service life of the asset. And it does not provide for any amendment to the terms and conditions of the original lease. And on the other hand, the amended lease provides the lessee several options during the lease term. For example, the option to terminate the lease can be provided by either purchasing the asset or returning it.

#5. Primary and Secondary Lease (Front End and Back End Lease)

Under one, primary and secondary leases, lease rent is charged in this way. That during the initial period of the lease, the cost of the asset and the allowable profit is reduced, and then a secondary lease is granted at a nominal rent. In simple words, the rent charged in the primary period is much higher than in the second period. This form of lease arrangement is also known as the front-end and back-end scheme.

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