Lease finance is a solution in which a business owner can use equipment without the need of owing them. In this case, a leasing company buys the required assets on behalf of the business for which it’s required, and in return the business needs to pay monthly cost to them for using the asset. The borrower here is called a lessee on the other hand the finance company is called lessor and the monthly payable amount is called lease rental.
In lease finance the ownership of the asset remains with the lessor (finance company) until the end of lease contract. Post the end of the contract the lessee is left with two options- either renew the lease agreement, break it or else purchase the asset.
Just contrary from finance lease, in operating lease the risk as well as rewards associated with the ownership of the asset (repair and maintenance) are borne by lessor in place of lessee. The lessee here uses the asset for which he has to pay lease rentals monthly or yearly further he won’t own the asset when the lease agreement ends.
In hire purchase the buyer gets allowed to buy those assets that he cannot afford to pay as lump sum. The buyer can deposit a percentage of the sum and make rest of the payment in convenient monthly instalments to purchase the equipments or vehicles of use. Though the possession of the asset is given to the buyer as soon as the deposit is made and contract is signed however he can’t become the owner of the asset as long as the last instalment is made.
Sale and leaseback is an arrangement in which the seller sells the asset to the purchaser and then leases it back for a period of time. This means here the lessor becomes the lessee and he no longer owns the asset however can continue to use it. This type of arrangement is often common for fixed assets as real estate in which the buyer (lessor) gets stable payment from the lessee for a prior fixed period of time. Generally when companies need to free the tied-up capital in the asset still they require to use the same then they get into a sale and leaseback arrangement.
It’s more expensive than buying the asset.
Sometime it’s required to make some payment deposit at the start.
It’s often difficult to cancel the asset finance contract earlier.
Depending upon ones financial standing there can be a need of additional security.