Leasing

An arrangement in which a lessor company purchases an item of equipment directly from a supplier in order to rent it out to a customer/lessee company for a predetermined price and term. There is also an option to purchase the asset, which may be exercised at the end of the lease period for a residual value. This source of financing entails a tax benefit as it involves entering into contracts for a period that is shorter than the normal useful life of the asset. Therefore, sometimes there is an accelerated depreciation, as the residual value agreed in the contracts is very low. The purchase option is normally exercised. There are different types of leasing: finance leasing (the lessor is a financial institution) and operating leasing (the lessor is the manufacturer or distributor).