Direct Leasing

Under direct leasing, a company acquires the use of an asset it did not own previously. A firm may lease an asset from the manufacturer: IBM leases computers: Xerox leases copiers. Indeed capital goods are abundantly available today on a lease financed basis. A wide variety of direct leasing arrangements meet various needs of firms. The major types of lessors are manufacturers, finance companies, banks, independent leasing companies, special purpose leasing companies, and partnerships. For leasing arrangements involving all but manufacturers, the vendor sells the asset to the lessor, who, in turn, leases it to the lessee. In certain cases, a lessor may achieve economies of scale in the purchase of capital assets and may pass them on to the lessee in the form of lower lease payments.

Since 1963, commercial banks have been allowed to engage in direct leasing, and they have become highly active in the leasing industry. Independent leasing companies finance the purchase of a wide variety of equipment. In doing so, they frequently borrow from banks, securing the loan with the assignment of the lease payments. Special purpose leasing companies confine their operations to certain types of assets; computer leasing companies, for example, lease mainly computer hardware and peripheral equipment. In recent years, high tax bracketed individuals have formed partnerships for the purpose of purchasing equipment and leasing it to companies. The tax shield afforded by the investment tax credit, accelerated depreciation charges, and interest paid on borrowings may be more valuable to them than to a corporation. As a result, both the lessor and the lessee may benefit. Much more will be said about this when we take up the economic benefits associated with leasing.