Maybe you don’t know precisely what is a lease about or how it works. You must understand that leasing is a way to strengthen your business by obtaining new assets.
This article will explain lease agreement meaning and tell you the pros and cons of this type of financing alternative. Plus, you’ll learn the differences between financial leasing and operating leasing.Loans are a great alternative to leasing
What is a Lease?
A lease outline the terms to agree in a property rent and acts as a legally binding contract.
So, leasing is an agreement between the lessor and the lessee to rent an asset for a specified period of time. The financial entity or bank approves the lease contract to the lessee and hands them the asset in exchange for a monthly fee (plus interest).
You can lease goods such as vehicles, equipment, or commercial spaces.
One of the main advantages of leasing is that you don’t have to make one-time investments of large amounts of capital to use the asset.
You can access this financing alternative through a leasing company or a financial institution. Although you can also lease something from an individual.
The purpose of the rental agreements is to protect both parties by establishing their responsibilities and rights.
How does Leasing Work? The Lease Contract
Now that we have clarified the term “leasing,” let us focus on how it works.
Upon its approval (if you meet the requirements), you will have to sign a contract. The rental agreements are a legal document that delineates the rights of both parties and helps ensure that they meet their obligations.
The more elaborate the contract, the better the protection for the signers, so if you want to make one, it would be an excellent option to have legal advice. If the lessor or the lessee breaches any one of the terms, the agreement will cease binding.
How to Make a Lease Agreement
A basic lease rental agreement should include:
- Duration of the contract or the rent agreement.
- The monthly payment amount (monthly rent)
- Penalties for late payments
- The conditions of the agreement which both parties must do.
- Responsibilities of each of the parties
- Signatures of lessor and lessee
The lease agreements also include restrictions on the use of the asset and who should be responsible for its maintenance costs, for instance, if it’s a commercial lease or residential lease.
The contract length will depend on the type of property, for example, a vehicle, machinery, or location. If it is a long-term lease, you have to take into consideration this for the rental cost.
Consider the regulations of the State where you will sign the agreement.
You will receive the asset after signing the leasing contract.
Is Leasing Right for You?
Imagine that you need a truck for your business, but you don’t have enough capital to buy one. But you really need one because it will allow you to increase your sales and be one step ahead of the competition. So you decide to lease one.
Of course, you must be sure that a lease or rental agreement is the best option for you.
You decide to answer the following questions to know if the lease rental agreements are what you need:
- Is it more affordable than a business loan?
- Can I pay the lease payments installments (plus interest)?
- Am I saving money?
- Is it cheaper to lease than to buy? Remember, you won’t be the property owner.
The next step is to go to the lender to learn more about how their leases work.
Their advisors will explain the details of the lease, for example, if you have to pay an advance or how much you’ll pay each month. They’ll also tell you if you have the option of buying the asset at some point or if there are any tax benefits.
Finally, you will receive the lease agreements, you don’t need a down payment, and you will have to review the term of the lease and sign the lease. And that is it. The truck that you need so much now is yours, so to speak.
Pros and Cons of Leasing
Now you know what is a lease, let us review the leasing advantages and disadvantages. This will help you decide if a rental agreement is the right thing for you or you should get a different financial product.
Pros of Leasing
- Leasing is not purchasing. Leasing is a rental agreement and the best option for those who cannot buy an asset because they don’t have the money or don’t want to compromise the business’s liquidity by investing a large amount of capital.
- Transparent terms and legal protection. You know from the beginning how much the monthly payments will be and how long the agreement will last. In addition, in the event of a dispute, the lease agreement will cover you with legal guarantees.
- Flexibility. At the end of a lease agreement, you may return the asset, purchase it or sign a new lease contract.
- Efficient cash management. Leasing helps businesses with low cash flow to get the machinery or equipment they need. That way, they don’t have to invest all their capital in purchasing the asset and instead use it to pay the payroll or buy inventory.
- Tax-deductible. In most cases, leasing is tax-deductible since it is an operational expense. Thus, the company can make significant savings.
Cons of Leasing
- You must know leasing is not purchasing. Even though you can use the asset, you are not its owner: you cannot modify, enhance or update it to increase its usefulness or improve its performance (although some leases have a purchase option).
- You pay more in a rental period. In the long term, you will be paying more to lease the asset than if you purchase it.
- Obsolete assets. You commit to the long-term use of assets that can quickly devalue or become outdated, which could hinder your work.
- Too much paperwork. Upon signing the lease agreement, you must provide several documents and thoroughly examine the asset you want to lease, making it a complex process.
- It limits access to loans. The leasing as debt is a reason to reject you for some lenders when asking for a loan.
Lease Agreement Requirements
Although there are some requirements for leasing, these depend entirely on the asset or property you want to lease. The following are some of the most common:
- Payment ability. You need to prove that you have a good income by submitting several documents, such as your account statements, mortgage, employment information, etc.
- Good credit score. A high credit score shows the lessor that you are up to date with other credit obligations.
- Cosigner. Someone to pay the dues in case you cannot. Some companies require a cosigner for applicants who don’t have a good credit score.
- Insurance. A lessor or leasing company might require you to get insurance, especially for vehicles and properties.
Types of Leasing
To help you decide if this is the solution you are seeking for your business, we’re describing the different types of leasing you can find in the market:
May you have wondered what is a capital lease? Well, you must know is the same as the financial lease.
With this type of leasing, the financial institution can transfer the property rights to the lessee when the contract ends. In other words, you have the option to purchase the asset to become its owner.
Thus, you can record it as a fixed asset in your accounting books.
The lessee can only record the interest of the total payment of a capital lease as an expense. But this type of lease has the advantage of reducing taxable income, given that you can claim depreciation of the asset.
If you want this type of lease, make sure you know the cost of the purchase option beforehand.
The operating lease doesn’t offer the option to purchase the asset at any time.
During the lease period, the lessee maintains unrestricted use of the asset but may be responsible for its condition by the end of the agreement.
These contracts are great alternatives when companies need to replace equipment or vehicles on an ongoing basis.
Under this rental agreement, you purchase an asset but sell it to a company that will lease it back to you. In other words, you transfer ownership of the property to a third party but continue to use it as long as you pay a monthly fee.
You can agree to the details of the leaseback arrangement, such as payments and duration, immediately after the asset’s sale.
Businesses use this type of lease when they need the cash they used to purchase the asset for other investments. Therefore, they sell that asset but continue to use it and pay manageable amounts.
What can you Get with a Lease?
Here are the types of things you can use a lease for, to understand better what is a lease:
Rental Property (Commercial Real Estate Leasing)
These commercial leases can use them to lease physical spaces for the sole purpose of opening a business or a new branch.
You must apply to residential leases and agree with the owner the agreement terms, which are usually 12 months. However, it is also possible to find venues that renew the contract every month.
With this type of leasing, you rent a vehicle from a dealer for a given period and a certain number of miles.
You must pay monthly fees to use the vehicle, and at the end of the contract, you have to return. You can also purchase it if the contract offers that option.
Equipment leasing is a form of financing with which you can lease the following:
- mobile phones
- and much more
At the end of the lease agreement, you must return the equipment, purchase it, or renew the contract.
The Difference Between Lease and Rent
The main difference between leasing and renting is its time duration. Lease agreements are for an extended period, whereas a rental agreement can be for several days or one month. Once the lease period ends, you return the property to the owner.
Let’s learn more about each one:
What is a Lease Agreement?
A lease agreement is a binding contract between two parties. The lessee can use the property owned by the lessor for a specified time.
Lease agreements cover rental of real estate as well as machinery or cars.
To break a lease, the lessee must negotiate terms with the lessor or face a civil lawsuit. In addition, they risk forfeiting the return of their security deposit and may receive negative entries on their credit report.
Some types of lease agreements offer a purchase option at the end of the leasing period.
What is a Rental Agreement?
Rental agreements are not for fixed terms as compared to a lease agreement. Instead, these agreements are on a month-to-month basis.
These contracts can be issued to rent real estate, storage space, and land. People pay rent for videos, charter boats, and aircraft, use tools and other types of personal property.
Renters may be required to pay a security deposit and insurance to cover any damage to the property
Be the Owner of the Assets with this Alternative
If you have wondered what is a lease, now you’re probably wondering if it’s the best option for you. Well, there’s a better alternative: loans.
Think about it, with a lease, you will be paying a monthly installment to use something that will never be your property.
With a loan, the situation would be similar because you would be paying monthly installments. The difference, though, is that you own the asset from the beginning.
To own the assets will help you grow your business for example a car lease for your business deliveries
A small business loan from Camino Financial will help you become the owner of the vehicle or machinery you need to increase production and gain more customers.
By meeting simple requirements, you can get one of our loans in as fast as 2 days!Apply now!
Frequently Asked Questions on Leasing
What is Leasing? What’s an Example of Leasing?
When a person signs a lease agreement, they agree to rent an asset owned by someone else. The lessee (who wants to use the asset) pays the lessor (the asset owner) a fixed amount for a specific time.
Typical items you can lease include tools, tractors, forklifts, trailers, telephone systems, furniture, and equipment. Some people lease cars and trucks for an extended time by making monthly payments without owning the vehicle.
What is the Difference Between Lease and Finance?
When the lease term is over, the owner will take back the asset. The rental agreement has set a price for using the asset in lease payments. If you are financing an asset, you will pay off the entire purchase price in monthly’s amounts. If you don’t pay it off, the lender will take it away.
What is the Difference Between Lease and Rent?
Lease agreements usually are for 6 to 18 months for properties such as land, vehicles, houses, furniture, real estate, or equipment. Some types of leases have the option to buy the asset when the contract ends.
Conversely, individuals sign rental agreements for a shorter period, such as 30 days or a month-to-month basis, to rent a house, apartment, or car.
You can change rental agreement terms at the end of a 30-day period, whereas you can only make lease agreement changes when the lease ends.
What is a Guarantor on a Lease?
A guarantor is in charge of back up the responsibility of the tenant obligations in leasing documents. This person must guarantee all of the duties of the tenant under the lease.
Who is the Lessor in a Lease Agreement?
The lessor in a lease agreement is the party who owns the asset (the bank or financial institution).