Many businesses lease assets instead of owning them. Leasing is similar to borrowing money to buy the asset in either case, the business has the use of the asset and incurs an sbligation either to pay off a loan or meet monthly lease payments. The major difference is that if the business leases the assets it is owned by the lessee and at the end of the lease term the residual value will belong to the lessor. But in both the cases the business has the use of the asset. The lease is considered to be a form of debt finance.

CAPITAL LEASE is also called financial lease whichever is the term, a financial or capital lease is for a longer-term lease than as operating lease. Financial leases are non-concelable and therefore obligate the lessee to make payments for the use of an asset over a predetermined period of time. Even if the lessee. Does not require the service of the leased asset, it is contractually obligatory to make payments over the life of the lease contract.

Financial leases are commonly used for leasing land, buildings, and large equipments. The non-cancelable feature of the financial lease makes it quite similar to a longterm debt. The lease payment become a fixed, tax deductible expenditure that must be paid at predetermined dates over a definite period.

Failing to make the contractual payments may mean bankruptcy for the lessee. All outgoing are also met by the lessee.

Another distinguishing characteristic of the financial lease is that, the total payments over the lease period are greater than the cost of the leased asset to the lessor. The lease period is therefore generally closely aligned with the economic life of the asset. If the salvage value of the asset is expected to be negligible, the lessor must receive more that the assets purchase price in order to earn its required return on the rupees invested in the asset. Some financial leases give the lessee a urchase option at maturity.

OPERATING LEASE: This is normally a contractual arrangement whereby the lease agrees to make Periodic Payments to the lessor five or fawer year's rent for the assets services. Such leases are generally cancelable at the option of the lessee, who may be required to pay a predetermined penalty for the cancellation. Assets leased under operating leases generally have a useful life longer than the term of the lease. Usually they would become less efficient and technologically obsolete if they were leased for a longer period of years. These types of leases are useful for leasing items like Comuters and Motor Cars. At the end of the lease period the lessee returns the asset to the lessor who may again lease it to somebody else. Sometimes the lessee may also have the option to buy the asset at a predetermined price. In operating lease the total lease payments are less that the cost of the asset. Since the economic life of the asset will be longer at the time of terminatio90n of the lease. The lessor can always sell the asset easily.  

Many businesses lease assets instead of owning them. Leasing is similar to borrowing money to buy the asset in either case, the business has the use of the asset and incurs an sbligation either to pay off a loan or meet monthly lease payments. The major difference is that if the business leases the assets it is owned by the lessee and at the end of the lease term the residual value will belong to the lessor. But in both the cases the business has the use of the asset. The lease is considered to be a form of debt finance.

CAPITAL LEASE is also called financial lease whichever is the term, a financial or capital lease is for a longer-term lease than as operating lease. Financial leases are non-concelable and therefore obligate the lessee to make payments for the use of an asset over a predetermined period of time. Even if the lessee. Does not require the service of the leased asset, it is contractually obligatory to make payments over the life of the lease contract.

Financial leases are commonly used for leasing land, buildings, and large equipments. The non-cancelable feature of the financial lease makes it quite similar to a longterm debt. The lease payment become a fixed, tax deductible expenditure that must be paid at predetermined dates over a definite period.


