Leasing is a contractual arrangement in which the owner of an asset (lessor) allows another party—the user (lessee)—to use the asset for a specific period in return for periodic payments known as lease rentals.
In simple terms:
✔️ “Lease finance is a method of acquiring the right to use an asset without owning it.”
It is an alternative to buying an asset and helps businesses use expensive equipment, vehicles, buildings, or machinery without large upfront costs.
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2. Concept of Lease Finance
Lease finance is a source of medium- to long-term financing where asset ownership remains with the lessor, while the lessee gets the economic benefits of the asset.
Key characteristics of lease finance:
No need for upfront purchase.
Asset ownership remains with lessor.
Lessee pays lease rentals.
Useful for technology-based and rapidly changing equipment.
Lease can help in tax planning and cash flow management.
Contract can be flexible according to business needs.
Lease finance is widely used by:
Airlines
Manufacturing companies
Transport operators
IT companies
Construction businesses
Startups with limited capital
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3. Elements of a Lease Agreement
A lease agreement is built on the following essential components:
1. Lessor
The owner of the asset who gives it on lease
(Example: leasing companies, banks, NBFCs, car leasing companies)
2. Lessee
The user of the asset who pays rental periodically.
(Example: a company using leased machinery, a customer leasing a car)
3. Asset
The property being leased:
Machinery
Vehicles
Buildings
Computers
Aircraft
Ships
4. Lease Period
Duration for which the asset is leased.
Can be short-term (1–3 years) or long-term (5–10 years or more).
5. Lease Rentals
Monthly or yearly payments made by lessee to lessor.
6. Residual Value
Value of the asset at the end of the lease period.
7. Purchase Option (if applicable)
Some leases give the lessee the option to buy the asset at the end of the lease period.
8. Clauses and Conditions
Maintenance, insurance, taxes, termination conditions, penalties, etc.
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4. Types of Lease Agreements (Explained in Detail)
Leases are broadly classified into financial and operating types, along with many variants. Below are all types with explanations.
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A. FINANCIAL LEASE / CAPITAL LEASE
Meaning
A financial lease is a long-term, non-cancellable lease where all risks and rewards of asset ownership are transferred to the lessee, although legal ownership stays with lessor.
Features
Long-term lease.
Lessee responsible for maintenance and insurance.
No cancellation allowed.
Usually covers entire economic life of asset.
Lease rentals recover full cost plus profit of lessor.
Used for
Industrial machinery
Ships
Aircraft
Large equipment
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B. OPERATING LEASE
Meaning
Short-term and cancellable lease. Ownership and maintenance remain with the lessor.
Features
Short-term
Lessee can cancel
Lessor bears maintenance
Lessor leases same asset to multiple users (e.g., photocopiers)
Examples
Car leasing
IT equipment leases
Property leases
Photocopy machines
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C. SALE AND LEASEBACK
Meaning
A company sells its own asset to a lessor and takes it back on lease, releasing cash.
Used when
Company needs liquidity
To release working capital
To convert fixed assets to cash
Example
A factory sells its building to a leasing company for ₹10 crore and then leases it back for 10 years.
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D. DIRECT LEASE / SERVICE LEASE
The asset is directly leased from the manufacturer or leasing company.
Examples:
Tata Motors leasing trucks
Apple leasing MacBooks
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E. LEVERAGED LEASE
Meaning
A lease financed partly by the lessor’s own funds and partly by borrowed funds.
Leasing aircraft is commonly done through leveraged lease structures.
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F. CROSS-BORDER LEASE
Lease agreement between parties in two different countries.
Useful for:
Ships
Aircraft
Heavy machinery
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G. NET LEASE & GROSS LEASE
Net Lease
Lessee pays maintenance, insurance, and taxes.
Gross Lease
Lessor pays all expenses; lessee only pays rent.
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5. How Lease Finance is Used (Applications)
Lease finance is widely used across industries for several purposes:
1. Machinery & Equipment
Manufacturers lease:
CNC machines
Printing machines
Textile machinery
Cranes
2. Vehicles
Companies lease:
Cars
Trucks
Commercial fleets
Instead of purchasing them outright.
3. IT & Office Equipment
Companies lease:
Computers
Servers
Photocopiers
Office furniture
4. Real Estate
Lease of:
Factory buildings
Warehouses
Retail stores
5. Aviation & Shipping
Most airlines lease aircraft instead of buying:
IndiGo uses operating leases for Airbus aircraft.
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6. Advantages of Leasing
For Lessee
No huge capital requirement.
Easy financing.
No risk of technology becoming outdated.
Tax benefits (lease rentals allowed as expenditure).
Flexibility in replacement.
For Lessor
Stable income from rentals.
Ownership of asset is retained.
Asset can be leased to multiple clients.
Higher return compared to deposit interest.
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7. Disadvantages of Leasing
For Lessee
Long-term higher cost than buying.
No ownership benefits (except in financial lease).
IndiGo uses operating lease for almost all its aircraft.
Why?
Avoid massive capital investment.
Replace planes easily as technology changes.
Reduce debt burden.
Result:
IndiGo became India’s largest airline with low financial risk.
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Case Study 2: Startups Leasing Laptops
Companies like Flipkart, Swiggy, Zomato, and Byju’s lease laptops for employees.
Benefits:
Saves upfront cost
Easy replacement
Tax benefits
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Case Study 3: Sale & Leaseback by Tata Group
Tata Steel once sold certain assets and leased them back to release working capital during financial stress.
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Case Study 4: Leasing of Commercial Vehicles
Ola and Uber partner with leasing companies to provide cars/drivers on lease.
Outcome:
Drivers do not need to buy vehicles.
Companies scale operations faster.
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10. Conclusion
Leasing or lease finance is a powerful financing tool that enables companies to use expensive assets without buying them outright. It promotes business efficiency, improves cash flow, and provides flexibility for asset replacement. With growing technology and globalization, leasing has become a crucial part of modern financial management and is widely used across industries like aviation, IT, manufacturing, and logistics.
