Advantage and disadvantage of lease with risks associated with leasing

Q. State the advantage and disadvantage of lease.

Advantage/Favorable aspects of lease financing:

Lessee’s perspective:

(1) Full extent financing of the cost of capital goods;

(2) Flexibility in payment of lease rentals;

(3) Favorable duration of lease period;

(4) Medium term finance;

(5) Piecemeal financing device.

(6) Keeping working capital free

(7) Lease as a revenue expenses

(8) Procedural convenience

Lessor’s perspective:

1. Better security;

2. Tax planning;

3. More profitable;

4. High return on equity;

5. No entry barriers.  

6. Facility in accession public deposits

Disadvantage/Unfavorable aspect of lease financing:

Disadvantages of Lessee/Lessor:

1. Deprivation of equipment

2. Consequences of default

3. Inadequate protection against loss

4. Loss of terminal value

5. High interest cost

6. Loss of residual value

7. Lack of freedom to make changes

Q. What are various types of risks associated with leasing?

The following risks are associated with lease:

(1) Default risk.

(2) Credit risk

(3) Risk changing taxation law

(4) Risk of bankruptcy

(5) Acceleration of rents and other due amounts

(6) Risk of residual value

(7) Risk of war, physical damage of asset etc.