Chapter 3: Characteristics
Financial leasing is a popular financial arrangement wherein a leasing
company (lessor) purchases an asset on behalf of a client (lessee) and leases it to
the lessee for an agreed-upon period, typically covering most of the asset's useful
life. Here are some key features of financial leasing:
The essential of financial leasing company is both has the nature of credit
granting formula and also has the nature of an asset lease.
Main object of this company is the capital spent to experience invesment
costs to buy engineering assets.
Financial leases usually involve medium or long-term agreements, often
covering a significant portion of the asset's useful life. This provides the lessee
with the benefit of using the asset for an extended period without having to bear
the full cost upfront.
Obligation of the lessee: While the lessor retains ownership of the asset
during the lease term, the lessee is typically responsible for the maintenance and
upkeep of the leased asset. This helps in ensuring the proper functioning and
preservation of the asset.
While the lessor retains proprietorship of the asset when the lease term, the
lessee is generally responsible for the maintenance and upkeep of the leased asset.
This helps ensure assets are operating properly and maintained.
Tenant's rights: determine to purchase the property or continue renting
after the contract is terminated.
When drafting a contract, landlords and tenants reach appropriate
agreements regarding the risks and profits they receive.
During the reasonable term of the finance lease, the master finance leasing
company retains ownership of the finance and the lessee is obliged to deduct taxes.
This rent is the depreciation of the asset.
The rent is fixed throughout the contract period, and the average lease
payment for a finance lease is usually fixed throughout the contract period. This
allows lessees to better predict and manage their cash flow, knowing the accurate
number they need to pay each period
Another features of the financial leasing is customized terms, tax benefits,
off-balance sheet financing, sector-specific.
- Customized Terms: Because of the flexibility, structure of the lease terms
always changes to suit the specific needs of the lessee. This may include
options for early termination, purchase options or customized payment
schedules.
- Tax Benefits: Depending on the jurisdiction, financial leasing may offer
certain tax advantages. For instance, lease payments are often treated as
operating expenses, allowing the lessee to deduct them from taxable income.
- Off-Balance Sheet Financing: In some cases, financial leasing enables
companies to acquire assets without having to show them on their balance
sheets as liabilities, thus potentially improving financial ratios and
borrowing capacity.
- Sector-Specific: Financial leasing is prevalent in various sectors such as
manufacturing, transportation, healthcare, and construction, where the need
for expensive equipment or machinery is common, but outright purchase
may not be feasible or advantageous.
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Barykina, Y. N., Gavrikova, E. I., & Tang, M. L. (2020). Leasing as a tool for
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