Lease is a contract wherein the owner of the assets allows the use of the asset by another person over a specified period of time for consideration in the form of lease rentals. Lease Finance can be used as an effective alternative to other finance alternatives because of the following features:
Flexibility in structuring – The lease rental payments can be structured to suit the needs of the lessee. The rentals could be consistent; back ended, or front ended depending upon the lessee’s likely cash flows in future.
Cost Effective – It is particularly effective in case of companies enjoying a tax holiday. The lessor remains the owner of the asset, and can claim income-tax shield on depreciation. A part of this benefit is passed on to the lessee in form of lower rentals.
Leasing can substantially reduce the post tax cost of borrowing for companies with differential tax rates over the lease tenure. Companies with tax breaks will find this product attractive, particularly for items eligible for higher rates of depreciation such as computers, energy saving devices, pollution control equipments, etc.