Leasing Definition, Types, Benefits, And Examples Of Companies

What is leasing in business financing? Let’s see the types, examples, and benefits!

Leasing is a financing activity in the form of capital goods or assets for companies or individuals in carrying out business activities. For example, leasing a motorbike to expedite the marketing process of a distributor company. Usually, the debtor will repay the loan in installments.

The purpose of leasing is to assist business people in preparing capital for their business. Well, in this article, OCBC will invite you to know the meaning, types, examples, and benefits of leasing. Let’s see!

What is Leasing?

Leasing is a method of financing that is carried out through the procurement of capital goods and assets to be given to companies or individuals. Usually, the leasing recipients are entrepreneurs who run a business activity so that capital is needed to launch business activities.

In addition, leasing is a method of financing provided by a company within a certain period of time. The method of payment is through installments of an amount of money according to a mutual decision. When the debtor manages to repay it, then he has the option of buying it using the remaining value.

With this system, leasing is financing that helps the community to obtain business capital or buy expensive goods without having to spend a lot of money at once.

An example of leasing is when someone wants to buy a motorbike or car but has not been able to pay it off, so they will use it while paying installments to the lessor.

Leasing History

Leasing is a financing activity that has been carried out since 2000 BC, namely through the practice of the Sumerians. This is known from documents leasing livestock, water, and daily equipment on wild land. Subsequently, a separate institution emerged to oversee this activity in Babylon around 400 BC.

At that time, the Babylonians used leasing as a way of fulfilling their needs through plant seeds and farming tools. Subsequently, this practice was followed by Rome, Egypt, Ancient Greece, and so on.

Until 1850, Tom M. Clark from the United States became the first modern person to apply the practice of leasing in leasing a carriage.

Leasing Features

The features of leasing are as follows.

  • There is a rental period and installment payment period.
  • Ownership of the leased property remains with the leasing provider.
  • Usually, the object of leasing is in the form of capital objects that are really needed by customers or entrepreneurs to run their business.
  • There is a nominal installment of which the amount has been mutually agreed upon.

Leasing Purpose

Usually, a party will do leasing because it is based on the following objectives.

  • Getting expensive necessities in a fairly quick time, so you can immediately use it in installments.
  • Save on production costs because the purchase of tools is not done at one time.
  • The leasing provider usually conducts this financing in order to earn income from the loan interest.

Parties in Leasing

This financing scheme involves at least 4 parties. Well, those involved in leasing activities are as follows.

  1. Lessor
    Lessor is a business entity or party that provides financing facilities to the lessee in the form of capital goods. They will get back the capital plus profits through installments paid by the borrower.
  2. Lessee
    What is meant by a lessee in a leasing transaction is a company or individual that receives financing in the form of capital goods. When they manage to pay it off, the lessee can choose to buy it or return it to the lessor.
  3. Supplier
    The position of the supplier in the leasing transaction is as a supplier of goods ordered by the lessee which will be paid in full by the lessor.
  4. Banks
    Although not directly involved, banks often take on the role of providing funds to lessors. So, the leasing provider will use the bank loan as capital to meet the lessee’s request.

Types of Leasing

The types of leasing are as follows.

  1. Capital Lease
    Capital leases are the most frequently used leasing mechanism, namely by means of companies providing various kinds of capital goods needs of customers. Later, they will pay for the order at the supplier and get a refund through the lessee’s installments. In other words, the customer (lessee) is not directly related to the supplier.
  2. Operating Lease
    Another type of leasing is an operating lease, ie financing where the lessor buys goods to be rented out to the lessee within a certain period of time according to the agreement. Then the lessee only needs to pay the rental fee, while other costs have been borne by the lessor.
  3. Sales Type Lease
    Sales type lease is the sale of self-produced goods with a leasing mechanism. So, the company will get income from the selling price and interest deposited by the lessee.
  4. Cross Border Lease
    A cross-border lease is a leasing practice between a lessee and a lessor residing in different countries. Usually this is done for capital in the form of aircraft or military equipment.
  5. Leverage Lease
    Another type of leasing is a leveraged lease, which involves the involvement of a third party for capital. So, the lessor does not pay for the capital goods in full, but will joint venture with a third party. So, in the payment later, the lessee is dealing with more than one party.

Leasing Company

Some of the leasing companies are as follows.

  • PT Federal International Finance (FIF)
  • PT Astra Credit Companies
  • PT Oto Multi Artha
  • PT Bussan Auto Finance
  • PT Wahana Ottomitra Multiartha
  • PT Adira Dinamika Multi Finance Tbk
  • PT Summit Oto Finance

Leasing Benefits

This financing scheme brings several advantages for both the lessor and the lessee. The benefits of leasing are as follows.

  1. Avoiding Inflation
    Leasing is one of the loan schemes that can help you avoid inflation because the payments are made according to the financial unit in the previous agreement.
  2. No Collateral Needed
    To do a lease, there is no need for an upfront guarantee. However, legal ownership of capital goods or payments that have been made previously can be used as collateral for the transaction.
  3. Flexibility
    Because it is carried out with a contract system between the lessor and the lessee, both parties can negotiate many things and the agreement is more flexible.
  4. Capital Saving
    One of the benefits of a leasing scheme is that the lessee does not need to spend a dime for the initial capital. This is because the lessor has provided up to 100% of the financing. So you can use the capital funds for other needs.
  5. Fast Service
    Because it is handled by a certain company, the leasing financing process is carried out quickly, simply and efficiently.
  6. There is Legal Protection The
    existence of a clear and legally binding contract makes the agreement between the lessor and the lessee obtain legal certainty. So, don’t worry about fraud and some other risks.
  7. Obtaining Assets
    The main benefit of leasing for a lessee is that he can obtain assets in the form of capital goods that can support his business activities.

From the explanation above, it can be concluded that leasing is one of the easy and profitable financing methods for entrepreneurs. Are you interested in trying it? Good luck!

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