There are many definitions and interpretations of a lease. Accounting, tax, legal and financial advisers all have different perspectives on leasing, as do government regulators and the users of leased vehicles and equipment. In the end, however, it all comes down to a very simple concept.
For the sake of simplicity, in this Brief Description of Asset-based Financing and Leasing, the word “equipment” includes vehicles.
A lease contract is an agreement under which the owner of the equipment conveys to the user the right to use the equipment in return for a number of specified payments over an agreed period of time.
The owner of the equipment is referred to as the “lessor”. The user of the equipment is known as the “lessee”. Very generally speaking, there are two kinds of leases. A capital lease is usually used to finance equipment for the major part of its useful life and there is a reasonable assurance that the lessee will obtain ownership of the equipment by the end of the lease term. An operating lease usually finances equipment for less than its useful life and at the end of the lease term, the lessee can return the equipment to the lessor without further obligation.
A lessor can be an individual or a corporation. In most cases, lessors are corporations specializing in financial services. They can be privately-owned companies, publicly-traded companies, divisions or subsidiaries of domestic or foreign banks, trust companies, insurance companies, manufacturing companies or automobile dealers.
Source: Adapted from Canada Leasing Review published by Asset Finance & Leasing Digest (a Euromoney publication) in association with CFLA, April 1995
Clarity Leasing is a privately held equipment finance firm that specializes in alleviating the capital restrictions on growing companies.