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Saturday, April 17, 2021

Pros and Cons of Lease! | Benefits and Drawback of leasing

 

Leasing assets and assets is an old-fashioned practice that has been gaining momentum in recent years. According to 'Marwan Mohammed Abu Orabi' (2014) (published in the Global Journal of Management and Business Research: C Finance) Leasing is a contract between the lessee (owner of the property) and the leaseholder (user of the property) as lease payments or lease payments In return the property is provided for use for a specified period.

Benefits and Drawback of leasing


Leasing is becoming popular to solve the fixed asset demand issues faced when buying a property. It is important to understand the pros and cons of leasing before leasing a property or property.

We Listed below are some leasing pros and cons for both the user and the property owner, i.e. the lessee and the lessee. Let’s look at them.


BENEFITS OF LEASING TO THE LESSEE

(PROPERTY USER)

There are various benefits to leasing to the lessee listed below:

 

1. No initial investment required

·   Leasing is usually taken or granted on those assets or properties that require a large financial investment.

·       It offers 100% financing without the need for any immediate fees.

·   In this way, the lessee does not face any obstacles in starting the business without any initial investment, although some leasing companies insist on paying the first lease rent in advance.

2. Appropriate and easy financial source

·       In leasing, the initial cost of raising funds is very low compared to long-term loans.

·       There is no need to mortgage any property because at the time of the lease, the ownership is in the hands of the lessee.

·    It allows companies or lessees to use an property or asset with flexible formalities. So, it is cheaper and faster than other options.

·   Leasing a property costs less than other available financial alternatives.

3. Free from control terms and conditions

·       The lessee is exempt from various regulatory terms and conditions such as representation on the board, conversion of debt to equity, and payment of dividends.

·       This prevents an invasion of the tenant's financial independence.

Therefore, leasing funds are preferred over institutional funds.

4. Less delay

Generally, the time it takes to implement a lease proposal is less than the term-loan financing. This allows the company/lessee to retain the right to use the property or property with minimal delay.

5. Flow of capital is balanced

·       The leaseholder's cash flow can be balanced by properly designing the lease.

·       Lease rentals are usually paid from funds generated by the use of the property or property.

·       The ability of the lessee to pay rent is kept in mind when determining the lease term.

·       If the property does not generate enough income to pay the rent, the institutional financial repayment will usually be a burden in the early years.

6. Fast and simple documentation procedure

it is free from the hassle of long and tedious procedures of institutional financing and Leasing arrangement involves a simple and quick documentation process

7. Flexibility and comfort

·       If the lessee/company does not require the use of the property until the end of the lease term, the lease may be terminated in the event of an operating or service lease.

·       So it can be said that this is a convenient and flexible financial system.

8. Less Maintenance Costs  

·       In case of gross lease arrangement, the specialized services provided by the lessor can be used for the maintenance of the asset leased.

·       Also, in case of an operating lease, there can be a provision of asset maintenance which is provided by the lessor.

9. Higher Capital Return  

·       In case of lease, the asset does not appear on the balance sheet on the asset side as the lessee has only the right to use the asset and not own it.

·       This indicates a higher rate of return on the capital employed resulting in higher earnings per share.

10. Tax benefits

·       This will greatly benefit the lessee in reducing tax debts as lease rentals are considered a revenue expense.

·       Lease rentals can be adjusted by the lessee, thus helping to plan taxes and reduce tax liabilities.

·       It is a good source of income for profit-making companies with high tax liabilities and low capital.

 

11. There is no risk of using the property / Asset

·       He is the owner of the property because the risk of using the property or property is on the tenant’s shoulders.

·       The lessee can change the property at any time with the latest and updated technology.

 

12. Potential for growth

·       The leasing industry has high potential growth.

·       The lessee can obtain property or equipment for the business even during a recession when pressed for funds.

·       It can maintain growth momentum during a recession.


Drawback (cons) of leasing to the lessee

(PROPERTY USER)

Leasing is not always in favor of the lessee. The lease has Drawbacks to its credit, which are listed below:

 

1. Risk in the use of lost property

If the financial position of the lessee deteriorates or the leasing company terminates, the use of the property may be lost to the lessee.

2. Renewal is not allowed

Since the lessee is not the owner of the property or property, no significant changes can be made to the property or property.

3. No Permission To Renew

The lessee cannot make significant changes to the asset or property, since he is not the owner of the asset or property.

4. Loss of backup value of property

Insurance value is the estimated value at the expiration of the useful life of an asset.

At the end of the lease term the lessee cannot realize the security value of the property because he is not the owner of the property, but rather the property is returned to the lessee.

5. Loss of warning period

Conversely, if a property or asset is purchased, the buyer may change it for any other reason, such as to enhance its use or to modernize or incorporate his personal choice decor.

It usually takes a long time to create funds to repay an asset from it.

The term debt refers to a period of time in which the loan amount is repaid. But in lease arrangements, such prohibition period is not allowed.

6. Penalty for termination of lease

If the lessee terminates the lease before its term, the lessee may be subject to certain penalties.

7. High cost

For the lessee, lease rentals include a margin on the cost of risk of using the property. That is why it is considered as a form of high cost financing.


Benefits of Leasing to the Leaseholder 

(PROPERTY OWNER)

The tenant who leases the property mentions the various benefits of leasing below:

 

1. Faster and higher profit

The lessee receives the lessee from the lessee, which helps to make a higher profit.

Profits from leasing property take into account the cost of capital and the risks associated with it.

The rate of return is faster and higher than the lessee paying for his debts to acquire such assets.

2. Trading on stock

For tenants, the stock can be traded.

Leaseholders can earn high returns on equity with adequate credit and low share capital.

3. Security

If the lessee fails to pay the rent, the lessee may resell the leased property, property or equipment, and the tenant's interest is protected here.

4. Tax Benefits

As the property owner is limited, it is possible to claim various tax related benefits such as depreciation and investment incentives.

Depreciation is deducted from income. The lower the income, the lower the tax levied on it.

If the lessee falls into the bracket of higher tax, he can lease the property or assets with higher depreciation and reduce his tax liability.

5. Increased sales

When manufacturers increase their sales with the help of leasing financing through a third party, the lessee may claim some profits from the manufacturers.


Disadvantages of Leasing to Tenant

(PROPERTY OWNER)

The various disadvantages of leasing to a lessee related to the lease of property or property are as follows:

 

1. There are no benefits of price hike

Lease rents are usually fixed throughout the lease term, so if there is any increase in the price of the property due to inflation, there is no benefit to the lessee.

2. Increased cost due to loss of user benefit

Benefits available to property users such as concessions and obligations on GST / VAT, etc are not available

This increases the price of the property or asset, which leads to higher lease rent charged by the lessee.

3. Competition in Market

The number of leasing companies around the world has increased in recent years. Because of this increased competition, the lessee will have to lease the property at a lower lease rate and may not receive the expected return on investment on the asset or property.

4. Long-term investment

The capital costs earned through lease rentals usually take a long time to recoup the tenant’s cost.

Since lease rentals also involve inherent risks, it does not represent real perceived profits.

5. Cash flow management

Due to unforeseen market fluctuations, it is very difficult to manage the efficient use of cash flows that largely determines the success of leasing businesses.

6. High risk of obsolescence

In the current era of rapidly changing technology, there is a risk that technical equipment will become obsolete (unused), which is also on the tenant’s shoulders.

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