After reading this article you will learn about the Advantages and Disadvantages of Leasing for the Lessor.
Advantages of Leasing to the Lessor:
1. Higher Profits:
The lessor acting prudently can make high profits from leasing of the asset. The profits will take care of his cost of capital as well as the risk involved.
2. Tax Benefits:
The lessor being the owner of the asset can claim various tax benefits such as depreciation, investment allowance, etc. In fact, leasing has been successfully employed by the leasing companies to reduce their tax liabilities.
3. Quick Returns:
The lessor gets quick returns in the form of lease rentals as compared to investment in other projects which have a longer gestation period.
4. Increased Sales:
Lease financing through third parties has helped manufacturers to increase their sales. The lessors are also in a position to demand certain concessions from the manufacturers.
Disadvantages for the Lessor:
1. High Risk of Obsolescence:
The lessor has to bear the risk of obsolescence especially in the present era of rapid technology developments.
2. Competitive Market:
As a number of leasing companies have emerged in recent years in India, the lessor has to face a tough competition from Indian as well as foreign companies. Due to this competition, the lessor may not be able to obtain sufficient lease rentals to recover the cost of the asset and his expected profit on investment as well as taking the risk.
3. Price-Level Changes:
Inspite of the increase in prices of assets due to inflation, the lessor gets only fixed rentals based on previous costs.
4. Management of Cashflows:
The success of a leasing business depends to a large extent upon efficient use of cashflows which are very difficult to manage because of unexpected market fluctuations.
5. Increased Cost due to Loss of User Benefits:
The lessor is not entitled to certain benefits available to buyers who are actual users of the assets such as concession in sales tax, duties, etc. This increases the cost of the asset and compels the lessor to charge higher lease rentals.
6. Long-term Investment:
It usually takes a long time to recover the cost of the lessor in the capital outlays through lease rentals. Thus, lease rentals received may not represent actual realised profits because of inherent risks involved. Payment of dividends out of present earnings may ultimately result into payment out of capital.