Leasing

Leasing is another method of acquiring the equipment, for a longer period of time as compared to renting. It is a long term alternative to direct ownership of the equipment. The leasing company (i.e. owner of the equipment) is known as lessor whereas the user of the equipment is known as lessee. Lease is a contract between the lessor and the lessee wherein the lessee uses the equipment owned by lessor by paying the rentals over the lease period. Mostly the lease period is more than six months and may run up to years. It is important for the lessee to know about the details of past and ongoing leases in which lessor is involved and also to check the terms and conditions of the lease agreement before entering into lease contract with lessor. Most of the equipment leases are noncancellable. During lease period the lessor retains the ownership of the equipment and also gets the tax benefits from depreciation of the equipment. Thus there is no tax benefit to lessee from depreciation of the equipment. However similar to renting, lessee gains tax benefits as the lease payments are considered as an expense. Due to leasing, the capital of lessee is not tied up in purchasing the equipment and lessee can use it for other investment. Even if the equipment is purchased through loan arrangement, the owner has to pay an initial down payment. However leasing can provide 100% financing, including the cost delivery and installation of the equipment . Lease payments can be made monthly, yearly or at other time intervals as agreed upon between the two parties. The lease payments need not necessarily be uniform over the lease period and there is flexibility of coordinating the schedule of payment (to be made by the lessee) to that of revenue generated from use of the equipment by the lessee. Generally, the cash inflow due to use of the equipment at the beginning may be low and thus the lessee prefers to pay less amount at the beginning of lease period. This type of payment arrangement may be accepted by the lessor from tax considerations as the lessor receives less payment at the beginning.

Two types of commonly offered leases through which construction equipments acquired are finance lease and operating lease. The finance lease is generally offered by a financial institution (usually a bank or a finance company) and the equipment is leased to the lessee. The lease period may extend up to the operating life of the equipment. The rental paid by the lessee over the lease period covers the cost of the equipment less the estimated residual value at the end of lease period, along with the profit margin of the lessor. The lessee has the option to purchase the equipment with a discounted price or a predetermined price at the end of the lease period. Usually the lease contract can not be cancelled till the lessor has recovered the investment cost at the end of the lease period. The finance lease is stated on lessee's balance sheet.

The operating lease is offered by the manufacturer or dealer of the equipment. In operating lease, payment charges are lower as compared to finance lease. In this type of lease, lessor (manufacturer or dealer of the equipment) provides the skilled service personnel required for carrying out the repair and maintenance operations and this type of arrangement is more suitable for sophisticated equipments requiring specialized repair and maintenance. Thus in this type of lease, lessee does not hire service personnel required for carrying out servicing and maintenance operations. Usually lessee returns the equipment to lessor at the end of lease period. Unlike finance lease, operating lease is not stated on lessee's balance sheet and is often referred to as off-balance-sheet financing.