Advantages And Disadvantages Of Lease Agreement
The owner receives quick returns in the form of leases compared to investments in other projects that have a longer lifespan. Since leasing expenses reduce net profit without more value, this means limited returns or reduced returns for an equity shareholder. In this case, the objective of maximizing assets for shareholders is not achieved. The owner is not entitled to certain benefits that are available to buyers who are actual users of the assets, such as. B reduction of TAX on turnover, customs duties, etc. This increases the cost of the asset and forces the lessor to calculate higher rents. If the company pays rent for land, it cannot benefit from a capital gain on the land. The long-term lease also remains a burden for the company, since the contract is blocked and the costs are set for several years. In a case where the use of the asset after a few years does not comply with the requirement, lease payments become a charge. There are several advantages of renting or renting equipment: leasing involves the separation of ownership from the economic use of equipment.
Although ownership of the property belongs to the owner, the tenant has full control of the rented appliances in his possession. Other forms of long-term financing, for example.B equity or bonds, dilute the ownership of the company`s promoters. Leasing is one of the simplest sources of medium- and long-term financing. No mortgage is required on the assets, as ownership of the leased assets remains in the hands of the lessor and is not transferred to the lessee. Since rental rents are considered yield charges for the determination of taxable profits, this is advantageous for the lessee to minimize tax obligations. In addition, the lessor, which is generally in the top tax bracket, passes on the benefit of the depreciation benefit in the form of reduced leasing payments to the lessee. Rents don`t care about lifespan. It usually takes a long time for the asset to generate funds to repay it. For this reason, the fixed-term credit provides for a certain period of moratorium on repayments. However, such a moratorium is not permitted under lease agreements. The lease of assets or services may normally be cancellable, allowing the leasing entity to terminate the lease if it no longer requires the use of the asset. It is therefore a very convenient and flexible method of financing capital assets.
The rental of assets and real estate is an ancestral practice that has gained momentum in recent years. According to Marwan Mohammad Abu Orabi (2014) (published in the Global Journal of Management and Business Research: C Finance), a lease is an agreement between the lessor (owner of the asset) and the lessee (user of the asset) under which the property is handed over for a fixed term in return for regular payments known as rentals or leasing. Leasing is gaining popularity to solve the fixed asset problems that the asset faces when buying the asset. It is necessary to understand the advantages and disadvantages of leasing before opting for the rental of the property or asset. However, leasing is not without its drawbacks, some of which are as follows: this lease is valid for a basic period during which the contract cannot be terminated. The duration of this base period depends on the economic life of the asset and is generally less than the expected life of the asset. This agreement allows the lessee to use the asset at the end of the basic life or, alternatively, the lessee may purchase the asset at a negotiated price at the end of the lease. .