Direct lease

From CEOpedia | Management online

Direct lease is a very uniqe type of financial service for the banks themselves. In this kind of service the bank is the lessor and at the same time, the owner of the specified equipment[1]. As the owner, bank leases it directly to the end customer, what results in this not being considered a loan.

In short words, those leases are executory contractual agreements, usually between two sides, a customer and a bank, where bank lends equipment it is an owner of, for a rental fee, applied for a specified time period. In a case where the bank doesn't have a designated department for booking direct leases, a lot of entries and characteristics of it, will usually be reflected within the bank's financial statements. That is assuming the bank runs a leasing division[2].

Types of direct lease

Two types of a driect lease are being distinguished: bipartite lease and tripartite lease[3].

  • Bipartite Lease

In this case there are two sides taking part in the transaction. They are: equipment supplier cum lessor and a lesse. It usually operates in a form of operating lease with built-in facilites, which can be for example upgradation of the equipment or addition to the original configuration. The lessor is bound to maintain the asset, and if the situation requires that, to replace it with on-pair equipment.

  • Tripartite Lease

In this case there are three sides taking part in the transaction. They are: equipment supplier, lessor and lessee. A very innovative sales-aid variant of the lease exists, where equipment supplier arranges for the lease finance in few possible ways:

  1. By providing a reference of a potential lesse directly to the leasing company
  2. By negotiating with a customer on behalf of the leasing company, usually taking care of the terms of a lease
  3. By arranging a lease on their own account and preparing a discount for the lease receivables with the leasing company

Advantages and disadvantages of direct lease

There are few advantages to the direct lease[4]:

  • Bank usually gets higher yield than while conducting equipment loan on an equivalent term
  • Bank is safe from the use of accelerated depreciation and experiences tax benefit
  • Often, residual values and renewable leases may increase the yield
  • The service being on-demand type
  • Maintaining current customers and expanding new customers group

There are also some downsides and hindrances[5]:

  • Bank would have to invest into training courses for inexperienced personnel
  • Developing a direct lease department might take some time and funds
  • Added tax and other legal aspects may end up being troublesome and time consuming, there are lots of documents that have to be submitted
  • Insurance program would have to be designed properly
  • Accounting department would receive a lot more work
  • Bank would have to figure out how to dispose returned equipment, that is expired in terms of leasing

Examples of Direct lease

  • Aircraft Leasing: In this type of direct leasing, the bank buys the aircraft and leases it directly to the buyer for a certain period of time. The bank is the lessor and the buyer is the lessee. The buyer will be responsible for maintenance and other costs associated with the aircraft.
  • Automobile Leasing: In this type of direct leasing, the bank buys the car and leases it to the customer for a certain period of time. The customer is responsible for all the costs associated with the car, such as maintenance, insurance, etc.
  • Real Estate Leasing: In this type of direct leasing, the bank buys a property and leases it to the customer for a certain period of time. The customer is responsible for all costs associated with the property, such as taxes, insurance, etc.
  • Equipment Leasing: In this type of direct leasing, the bank buys the equipment and leases it to the customer for a certain period of time. The customer is responsible for all costs associated with the equipment, such as maintenance, insurance, etc.

Other approaches related to Direct lease

Direct lease is an unique type of financial service which allows the bank to be both the lessor and the owner of the equipment. There are several other approaches related to this type of service:

  • Operating Lease: It is also known as a lease-to-own. In this type of lease, the bank will lease the equipment to the customer, who will use it and pay a fixed rate over a period of time. At the end of the lease period, the customer can either choose to buy the equipment or return it to the bank.
  • Sale-Leaseback: This is an arrangement in which a customer sells an asset to the bank and then leases it back. This allows the customer to generate cash from their existing assets.
  • Lease-Purchase Option: This is a combination of a loan and a lease. Here, the customer has the option to purchase the equipment at the end of the lease period at a predetermined price.
  • Equipment Finance Agreements: This is a type of loan in which the customer borrows money from the bank to purchase the equipment. The bank will then take the title of the equipment and the customer will pay the loan over a predefined period of time.

In conclusion, direct lease is a unique type of financial service which provides the bank with the opportunity to serve as both the lessor and the owner of the specified equipment. There are several other approaches related to this service, such as operating lease, sale-leaseback, lease-purchase option, and equipment finance agreements.

Footnotes

  1. ↑ Clarke P.S., 2017, ch. 12.2
  2. ↑ Clarke P.S., 2017, ch. 12.2
  3. ↑ Khan M.Y., 2013, ch. 2.9
  4. ↑ Clarke P.S., 2017, ch. 12.2
  5. ↑ Clarke P.S., 2017, ch. 12.2


Direct lease — recommended articles
Full service leasing — Disposal of fixed assets — Ijarah — Gift letter — Distribution In Kind — Service lease — Depreciation vs. amortization — Vendor take-back mortgage — Forced sale value

References

Author: Jakub Urban

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