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What Are the Pros and Cons of a Financial Lease?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 25 February 2019
  • Copyright Protected:
    2003-2019
    Conjecture Corporation
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Also known as capital leases, financial leases are situations in which buyers purchase assets, then choose to lease those assets to other entities. The process of leasing an asset can be quite lucrative, but it does require a great deal of management in order to realize the desired outcome. Governments, big business, and even smaller entrepreneurs can make use of the financial lease model to generate revenue, if they structure the arrangements properly.

One key benefit of a financial lease is the ability to use an asset to create and maintain a steady flow of revenue. For example, a buyer may choose to invest in a fleet of cars that is in turn leased out to a local company for a flat rate per car per month. If the deal is structured properly, the buyer retains ownership and takes care of expenses such as car and tag registration, while passing on the responsibilities of basic maintenance to the client. This means the buyer can use part of the monthly revenue stream to pay for the cars and bank the remainder. Ideally, the cars are paid in full before the lease expires, allowing the owner to amass a sizable return during the lease period, and then possibly selling the cars outright as a means of making one last bit of income from the assets.

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Another advantage to a financial lease arrangement that applies to both the lessee and the lessor is the possibility of including a clause in the leasing agreement that allows the client to buy the asset at the end of the contract term. This allows the owner to possibly already have a buyer in place once the lease ends rather than having to hold onto the asset for a time while attempting to market the asset for sale. From the perspective of the buyer, the buyout clause means there is no need to surrender the asset to the owner, making it possible to continue enjoy the benefits of use without interruption.

There are potential drawbacks to any type of financial lease arrangement. During the course of the lease, there is always the possibility that the asset will become damaged in a manner that renders it unfit for further use. In addition, excessive wear and tear may also mean that very little revenue is generated from the sale of the asset once it is back in the possession of the owner. While owners will normally include terms and provisions that offer some recompense for excessive wear on the asset, this is not always sufficient to offset the eventual losses sustained. For this reason, it is very important to arrange the terms of the financial lease so the highest possible return is generated over the life of the contract.

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