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ans Serif">Leasing is like hire purchase except that no deposit is required. It is a way of acquiring vehicles, plant or equipment without an initial outlay. The leasing institution (lessor) buys the equipment and leases it to you (lessee) in return for regular lease payments. The equipment is the security for the lease. At the end of the lease period, you may return the equipment to the lessor or purchase it for a previously stipulated residual price. The lease payments are tax deductible where the equipment is used to produce business income. Leases are generally available from finance companies and occasionally through banks.

ans Serif">Two types of lease:
Under an

operating lease, (or contract rental) the lessee pays a monthly rental for the use of the asset and then returns it to the lessor on completion of the lease period. The lessee has no responsibility for the value of the asset other than to return it in "fair wear and tear" with kilometres travelled or hours used not exceeding parameters agreed at the outset of the lease contract. Operating leases are suitable typically for substantial organizations with strong cash flows where use of an asset to generate income, rather than ownership, is the key business criteria.

ans Serif">With a finance lease, the asset is leased for an agreed period after which ownership normally transfers to the customer on a payment of a lump sum or "residual value" Sometimes referred to as lease to own, a finance lease requires the lessee to carry the risks and rewards of ownership, including the financial risk that market value may not equaql the residual value the end of the lease term.

Leasing versus ownership:

ans Serif" color="#008000">Lease

• ans Serif" color="#666666">Suitable for the use of secondary assets, i.e. not essential to producing core products/services
• ans Serif" color="#666666">Generally require a strong balance sheet (few organizations have all their assets leased)
• ans Serif" color="#666666">Can significantly reduce paperwork and the need to manage own assets)
• ans Serif" color="#666666">Removes residual risk i.e. the low returns on resale
• ans Serif" color="#666666">Lease payments are fully deductible if used for business purpose
• ans Serif" color="#666666">As an off Balance Sheet item, operating leases do not affect debt-to-equity ratios
• ans Serif" color="#666666">Does not build up equity in the business
• ans Serif" color="#666666">Can be more costly, particularly if the lessor believes the asset will be difficult to dispose of at the end of the lease period
• ans Serif" color="#666666">As a fixed term contract, leases have significant penalties for early termination
• ans Serif" color="#666666">Should not be seen as a means of finance when insufficient deposit is available