Leasing Financing

Leasing involves the issuance of property rights to someone for a particular duration against a periodic payment, also referred to as the lease rent. The owner of the property is the lessor and the person acquiring possession is the lessee. Leasing financing entails two types, that is, finance lease and operating lease. Finance lease involves the condition in which the lessor transfers all the property rights to the lessee. That is, the lessor gives the power to the lessee to operate the property as if they owned the full right to it; like the owner would have. Conversely, in the operating lease, the risk is not fully transferred to the lessee, but the lessor still gives direction on the procedures and activities taking place in the property.

The differences between finance and operating leases include meaning, terms of lease, the contract, transferability, maintenance, purchasing option, obsolescence, cancellation and tax advantage. For the finance lease ownership and risks is transferred to the lessee while in an operating lease, the lessor still holds the risks of the property. The lessee is offered purchasing option of the property after the end of the lease contrary to operating lease case. Moreover, contract in finance lease cannot be breached after signing while the operating lease contract can have changed after the signing of the agreement. The contract in finance lease is a loan and a rent in an operating lease. Furthermore, the finance lease needs an accounting system and offers a tax deduction on depreciation. However, operating lease requires no accounting system, and the tax deduction is for the rent payment.

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Advantages and Disadvantages

Advantages for the lease financing involve benefits for the lessor and the lessee. For the lessor, there’s continuous receipt of high-income profitability and high potential growth. Without investing in the property, the lessor still gains from the property and can have a focus on other activities increasing profitability. Moreover, the lessor still enjoys the tax benefit and preservation of the property by employing it to use. To the lessee, lease financing uses the capital investment, enjoys tax benefit, have technical assistance, and have an inflation friendly investment. Furthermore, the lessee has a chance of ownership and now having a cheaper investment.

However, lease financing also has some disadvantages. For the lessor there’s double taxation, the sales tax may occur twice, on purchase and on leasing and may be unprofitable in case of inflation. Moreover, the lessor faces a high chance of damage to the property by the lessee. For the lessee, there is a compulsion and lack of ownership in the end. Additionally, the leasing is costly, and the lessee does not have ownership, thus understatement as it can’t account as an asset for the lessee.

Benefits of Lease over Buying

Leasing of the highly depreciating properties like cars is beneficial. That is, the initial down payment and the monthly payment of a car can be higher in owning the vehicle. Besides, the fee of the car for a specified duration can change the focus from taking care of the car to finishing the payment, which can lead to high depreciation in the car. There is a loss of equity as most of the installments usually go to the installment instead of the principal. Moreover, in leasing, one pays only for the use and not for the depreciation.

Floating Rate Preferred Stock

Floating rate preferred stock is the paying of the dividend that varies from time to time. That is a preferred stock that has the bonuses change or reset at a specified interval in a predetermined manner. That contrasts the fixed quarterly dividends. It does not always change in prices since the dividends automatically shift the selling of the shares near to par.

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