Lease finance or lease financing and the term loan either short or long term are one of the ways individuals or business used in getting money or equipment they cannot buy on their own immediately due to financial constraint.
In this article, we are going to consider the benefits and drawbacks of both the term loan and lease financing. Firstly, let start with financing lease.
What is lease financing
Lease financing is one unique and important source of financing our business or project either short or long term. Here the owner of the asset to be leased gives the asset to a third party to use and get paid for the asset periodically.
The ower of the asset is called the lessor and the person given the right to use the asset is the lessee. Then the money to be paid periodically by the lessee to the lesor is called lease rental.
In the term lease financing, the lessee has the right to use the asset for the period agreed but the lesor still has the ownership of the said asset, by which after the agreement must have expired, he (lesor) will take the ownership and possession of his asset.
It might be also possible that an agreement will be reached between the parties for the ownership right be transferred to the lessee and he pays for (purchase in reduced price) the asset or enter into new lease agreement.
Note: Finance leasing allows the Lessee to take the asset with risks and rewards attached to the property on the same basis as an owner.
The lease is generally non-cancellable for a fixed period, during which time the Lessor can recover total investment through lease rental (periodical payments).
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From thw above said, financing lease can be classified into two
- Finance lease
- Operating lease
In this type of finance lease, the lessee has the risks and rewards on the asset as it would be if he purchased the item. The lessor has transferred the risks and benefits he has as the ower to the lessee.
This finance lease are in to stages
Stage one: The none cancellable period where by the lessor recovers the total investment on asset through the rent fee (lease rental) and it is known as the primary period which last for long time.
Stage two: The second period of lease financing takes shorter period for the lease rental to be paid.
Characteristics of lease finance
- During the primary period the lessor recovers all investment capital through lease rental
- Maintenance of the asset lies on the lessee
- The lessor does not take any risk or rewards in this period
- Lessors investment is secured since the agreement in this period is mot cancellable
- Money for secondary period of lease finance is called peppercorn rental
In Operating lease, the lessor do not transfer the risk and rewards of assets ownership to the lessee. In the term of operating lease, the primary period of lease is small such that the total investment on asset is not recovered by the lessor during the leasing period.
It is also the responsibility of the lessor to provide the lessee an advice on the maintenance, repair and technical knowhow during the operating lease period.
Characteristics of operating lease
- Lease term is lower than the total investment on asset
- The lessor has the risks and rewards of the asset
- Many lessee might be involved to recover the total investment on asset
- The lessee can cancel the lease agreement on short notice to the lessor
- Maintenance and repair advice is provided to the lessee
Where lease financing works
Small business enterprises (SME) benefit more in lease finance. The burden of sourcing for huge capital for purchase of capital assets is eliminated by paying lease.
All the entrepreneur have to do is pay lease rental monthly or as agreed in lease term and enjoy the asset as owner though not..
Advantages and Disadvantages of lease financing
Advantages of lease financing
- In lease finance, the total investment on asset is recovered fully by the lessor through lease rental
- Spending too much on asset acquisition is eliminated by paying lease rental on leased asset
- It is a highly profitable ventures since the rate of returns (lease rental) is much higher than the interest payable on financing the asset.
- Regular income to the lessor due to lease rentals
- Permanent lease rental even on inflation period
- All the risks and rewards of assets ownership is transferred to the lessee in lease finance
- Leasing terms are lower than using another form of capital financing
- A lease contract is often worked over a longer period than a bank loan
Disadvantages of lease financing
- Lessor losses in time of inflation due to permanent lease rental
- Tax is charged in time of purchase and leasing (Double Taxation)
- Asset loss of value due to lessee carelessness
- Costs on repairs lies on the lessee
- Lessee returns the asset to lessor on agreement period
- Term of lease financing can not be cancelled in lease finance
- Ignorance is not recognised in lease finance
- Might not be cost effective in long run.
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Lease financing companies
There are companies where you can a lease finance. Lets look at those lease finance companies
Madison Capital is a direct lender and can structure a lease or financing contract fitting your specific needs. They provides the experience and expertise necessary to determine your best finance leasing option.
Whatever your company needs to grow either to acquire, upgrade or replace equipment or vehicles can be financed at Madison Capital.
Wema bank is one of the finance leasing companies that helps you reach your desired goal in you business
Lending Club acts like a middle man helping you get lease finance but not the lessor. So what lending Club does is to connects lenders with borrowers, but don’t process the loan itself using a bank or financial counterparty.
Kabbage is a lending platform that is based in Atlanta, Georgia. Its focus is mainly on small businesses using an automated service to provide quick loans for their clients
Now lets talk about loan as another source of business funding.
Loan is a very vital tool used by many entrepreneur who has hit it hard in the world if not all.
When sourced at the right place, time and motive and applied as thought. So what is the term loan
What is a business Loan.
A term loan is a money you receive either from a bank or other financial institutions, a friend or others with the motive of repaying the money(Principal) with interest in the future.
So you can say that a business Loan is a money gotten from bank for the purpose of doing business and to pay back the money in future with accrued interest.
Here, the Principal is the amount of money you borrowed, and the Interest is the amount you are charged for receiving the loan.
So the interest is a fee the lenders are charging you for bearing the risk of giving you money.
Loans can be said to be either secured or unsecured.
A secured loan is a loan that is attached with collateral (assets like house, car or land).
This is done so that if the borrower doesn’t pay back, the lender takes possession of the collateral in place of the Principal.
The unsecured loan
An unsecured loan option is preferred, but not common as secured. If the borrower doesn’t pay back the unsecured loan (Principal), the lender doesn’t have the right to take anything in return.
Types of Loans
We have different types of loans and it suits different people with different reasons. So let go through them carefully for easy understanding.
Small business loans
People who engage in Small Business Enterprises (SME’s) are provided with small business loans by their banks.
This is a secured loan so business plan and collateral is needed to get this loan.
Personal loans can be spent on anything the borrower wants to, be it vacation, plan event like wedding and so on. Also you can source for this loan in almost every financial institution (Bank)
It is important to note that Personal loans are often unsecured and fairly easy to get if you have average credit history. The only disadvantage here is that the threshold is limited and it comes with high interest rates.
Mortgage loans are provided for people looking to have their own homes or those venturing into Real Estate. This is among the highest in the Principal you can get.
The house you are buying serves as security for the loan. So when the agreement with the lender is not reached, he will take possession of the house.
Interest rates of mortgage loans are normally lower than other one.
Cash advances loan are sourced from your bank when your are in need of money urgently. You can get it with easy but remember, interest rates arebon the high side.
Also you might not be given above $1,000 in cash advances which makes it to be considered sometimes after other means failed.
The students loans are made to support the financing of collage education of students. Mostly sourced student loan is Stafford loans, some still source with Perkins loans.
Student loan has a low interest rates to enable them pay after collage. Time at collage are eliminated from payment agreement.
So we have also see how the term loan can help our business to increase or get us a new house or car.
We have been able to learn what lease financing is all about, how it works and who leasing financing benefits. We also see the types of finance leasing companies and how they can help which example of them is kabbage.
Also we have come to lean what the term loan is ala about and who needs it. For we to benefit from the term loan we have to know when we need it, how much we need, what are we using it for, how are we going to pay back and when.
We have also see the types of loans available and who benefits.