What do you mean by Lease Financing ? Discuss its merits and demerits? (2024)

Meaning of Lease Financing— Lease financing is a contractual agreement between the owner of the asset who grants the other party the right to use the asset in return for a periodic payment and the other party who is the user of such assets. The owner of the party is known as Lessor and the user of the asset under such agreement is known as lessee and the rental paid is known as lease rental.

Merits of Lease financing

1. Cheap source—It enables the lessee to acquire the asset with a lower investment only.

2. No dilution of ownership—It provides the finance without diluting the ownership or control of the business.

3. Easy replacement of asset—The risk of obsolescence is borne by the lesser. This allows greater flexibility and cheap financing to the lessee to replace the asset.

See Also

A Comprehensive Guide to Leasing vs. Financing a CarShould I Finance a Car, or Pay Cash? Calculating the Costs | Capital One Auto NavigatorLease Financing : Meaning, Advantages and Disadvantages - GeeksforGeeksIs Leasing a Car a Good Idea? - Experian

4. Tax benifits—Lease rentals paid by the lessee are deductible for computing tax liabilities. It further reduces the cost of taking asset on lease.

Limitations of lease financing

1. Contractual constraints—A lease agreement may restrict the lessee to make any alteration or modification in the asset.

2. Renewal of lease agreement—The normal business operations and growth of the business is badly affected in case the lease is not renewed.

3. No capital gains—The lessee never becomes the owner of the asset inspite of paying heavy lease rentals. It deprives him of the residual value of the asset.