This article throws light upon the top five forms of financial lease. The forms are: 1. Sale and Leaseback 2. Direct Leasing 3. Leveraged Lease 4. Straight Lease and Modified Lease 5. Primary and Secondary Lease.
Financial Lease: Form # 1. Sale and Leaseback:
A sale and leaseback arrangement involves the sale of an asset already owned by a firm (vendor) and leasing of the same asset back to the vendor from the buyer. This form of lease arrangement enables a firm to receive cash from the sale of asset and also retain the economic use of the asset in consideration of periodic lease payments.
A sale and leaseback arrangement is generally preferred by firms facing shortage of working capital funds. The lessors engaged in sale and lease back include insurance companies, leasing companies, pension funds, private finance companies and financial institutions.
Financial Lease: Form # 2. Direct Leasing:
In contrast with sale and leaseback, under direct leasing a firm acquires the use of an asset that it does not already own. A direct lease may be arranged either from the manufacturer supplier directly or through the leasing company.
In the first case, the manufacturer/supplier himself acts as the lessor while in the second case the lessee firm arranges the purchase of the asset for the leasing company (lessor) from the manufacturer or the supplier and also enters into an agreement with the lessor for the lease of the asset.
Financial Lease: Form # 3. Leveraged Lease:
A leveraged lease is an arrangement under which the lessor borrows funds, for purchasing the asset, from a third party called lender which is usually a bank or a finance company. The loan is usually secured by the mortgage of the asset and the lease rentals to be received from the lessee.
The loan is paid back out of the lease rentals, may be directly by the lessee by paying only the excess amounts to the lessor. The lessor acts as the owner as well as the borrower and the lender is usually a bank, insurance company, financial institution or a private financing company.
Financial Lease: Form # 4. Straight Lease and Modified Lease:
Straight lease requires the lessee firm to pay lease rentals over the expected service life of the asset and does not provide for any modifications to the terms and conditions of the basic lease. Modified lease, on the other hand, provides several options to the lessee during the lease period. For example, the option of terminating the lease may be providing by either purchasing the asset or returning the same.
Financial Lease: Form # 5. Primary and Secondary Lease:
Under primary and secondary lease, the lease rentals are charged in such a manner that the lesser recovers the cost of the asset and acceptable profit during the initial period of the lease and then a secondary lease is provided at nominal rentals.
In simple words, the rentals charged in the primary period are much more than that of the secondary period. This form of lease arrangement is also known as front-ended and back-ended lease.