Finance

A lease is a term that is used in reference to a contract in which the lessee who is the user pays the lessor who is the owner for the use of an asset. This can easily be understood with the example of a rental agreement which is a mode of a lease that has an asset which is tangible. The lessor is the owner of an asset that he is not using. The lessee as with the case of leasing needs the asset owned by the lessor. A lease is the agreement that exists between the two binding the contract that exists between the two. A lease ought to be contrasted to a license in which the licensee uses the asset but can be stopped anytime by the licensor. Leases are of different types owing to the nature of the asset that is on lease (Chris, 2003).

Reasons and benefits of leasing
One reason that leads to leasing is that it helps the leasing organization to be competitive as well as productive. This is based on the fact that leasing helps the organization stay on top of technological advances thus maximizing its productivity as well as effectiveness. Technology advances day by day thus creating the need to change the technology that the organization uses from time to time. This is an expensive cost bearing in mind that the technology being used needs to be disposed. Leasing helps the institution in this case it only pays for the use of the asset that it is acquiring instead of buying a new asset. This is an effective move as it saves the organization funds that it would have spent in the acquisition of the new asset (Top Five Reasons to Lease, 2002).

Leasing makes it possible for the organization to predict its expenses more clearly. Leasing in this perspective replaces the upfront expenses that the organization would have incurred by lowering them to monthly payments that are lower than that cost. These payments can be made in a way that they do not affect the budget of the organization thus reducing the costs that the organization has to incur. The lease structure of the company as well as the business situation can enable the company to qualify for tax and accounting advantages that can be very beneficial to the organization (Top Five Reasons to Lease, 2002).

Leasing lowers the upfront costs as the organization can acquire the asset that it needs even at times when its budget does not support the purchase of the new asset. Leasing is an effective move as it preserves the working capital as well as existing credit lines and this frees cash for other expenses. Leasing also offers flexible pay structures as the organization pays only for the use of the asset and not other expenses. Leasing gives the organization the ability to bundle costs as it can cover all aspects that the organization needs thus reducing the operational costs for the organization (Top Five Reasons to Lease, 2002).

Leasing has a benefit to the organization that is leasing as it lowers the operational costs that the organization would incur in the purchase of the asset. It also gives the lesser the immediate possession of the asset as long as the deal has been sealed. Leasing allows the lesser to use the product even at times that his finances can not support the purchase of a new asset thus keeping the lessor in business. This gives time to the lesser to adjust his finances so as to plan for the purchase. Leasing is also advantageous in the sense that it allows the lesser the opportunity to try the asset before he can make formal plans to purchase the asset. Leasing gives the organization the opportunity to refresh its technology at lower cost than it would incur with the purchase of the new technology. Leasing also helps the organization to conserve capital it does not require down payments as well as compensation of balances. Leasing also reduces the end-of-useful-life hassles that happen when the asset needs to be replaced. The organization just takes the asset back to the owner with less hassle. Leasing reduces the costs of ownership as the purchase costs are reduced to monthly payments that are convenient to the lesser (Harris, 2010).

Types of leases
There are basically four types of leases. Operating lease is one type that is common and is usually a short term lease that is frequently associated with equipment whose value is expected to rise at the end of the lease. The other type of lease is capital lease and has a bargain purchase option. This is a type of lease that leads to cash flow management as well as flexibility of the organizations finances. Saleleaseback is another type of lease in which a company owns an asset then gives it to the leasing company for it to be leased. This is done as a move by the company to dispose assets that are not in use at the moment. The last type of lease is the trac lease. This is a type of lease that is applicable only to automobiles. In this lease the lessee assures the lesser that he will not suffer a loss at the residual buyout at the end of the lease (Chris, 2003).

Operating leases are very common and are the mostly used type of lease. This type of lease is an answer to certain criteria that have been established. This type of lease stipulates that the ownership of the asset does not automatically transfer to the lessee at the termination of the lease term. This has been a situation that has raised much concern offering critic for the leasing process. It also stipulates that the lease does not contain bargain options that may arise from the charged of the monthly payments. This has made leasing to be viewed as expensive in the sense that the lesser set the price for the asset without the consent of the lessee. The lease term is also supposed to be less than 75 of the useful life of the equipment. This is aimed at making sure that the lessee does not fully utilize the equipments value at the expense of the lessor. This is aimed at saving the lessor from the overexploitation of his asset that might occur in such an agreement. It also stipulates that the value of the lease payment ought to be less than 90 of the cost of the asset to prevent the lesser from exploiting the lessee. An example of such a lease is the lease of an aircraft that has an economic lifespan of thirty years being leased to an airline company for five years. In this case the airline company uses the asset for a span that is less than the lifetime value of the asset thus ensuring that the lesser is not at a loss from the agreement. This type of lease is commonly applicable with assets whose life span can be calculated (Sullivan  Steven, 2003).

The decision to lease or buy an asset is tricky as in both cases the motive which is the acquisition of the asset I met. This makes it hard to therefore stipulate which method is better than the other. In that case the decision of whether to lease or buy the asset is determined by the financial position of the lessee. This is in the perspective that the lessee chooses the option that is appropriate for his situation. The decision is also influenced by other factors such as the use that the lessee intends to use the asset for. This is used in determining the long term impact that the decision has to the organization (Linda, 2003).

Valuing financial leases
Financial leases are a type of lease in which the lessee chooses the asset that he needs and the lessor purchases the asset that will be used by the lessee during the period of the lease. The valuation of such a lease agreement is rather tricky and requires the alertness of both the parties. The lessee needs to calculate the value that the asset has in the market as well as the value that the asset will add to the organization. This is aimed at making an informed decision on whether he should lease the asset or purchase it. This move brings out the value of the transaction and the risks that the lessee is getting involved in. the lessee then looks for the lessor that will finance the lease agreement. The lessor looks at the value of the assets as well as its value at the end of the lease. This is for the lessor to ensure that the asset does not become a liability to him at the end of the lease agreement. The lessor calculates the value that the asset has as well as the amount that he is to part with for the purchase of the asset. This is compared with the amount that the lessor will receive from the lessee during the course of the lease agreement. The value of the asset at the end of the agreement is also put into consideration during the calculations (Stewart et al, 2000).

The lessee on his part calculates the value that the asset has in the market and the value that the asset will add to his organization. This is aimed at realizing the worth of the transaction prior to its inception. This value is compared with the payments that the lessee will make to the lessor as monthly payments. In this case the lessee is aware of the worth of the transaction as well as the impact that it has to the organization. This calculation is important to both parties as it determines whether the parties involved in the agreement will benefit from it or suffer a loss.

In such an agreement the lessor is the legal owner of the asset at the time of the lease agreement. This is owing to the fact that he is the person that financed for the purchase of the asset. The lessee on the other hand has the control over the asset and can purchase it at the termination of the lease agreement. In such an agreement the lessee is charged with the full benefits of the assets and is also responsible for the financial risks that appertain to the use of the asset. An example of a financial lease is where a financial organization offers to lease a factory to acquire a machine that it requires for effective production. In this case the financial organization does not need the machine but is in a position to purchase it. The factory needs the machine but is not in a position to purchase it. These two organizations come into an agreement in which the finance company buys the asset and leases it to the factory to use. The finance institution is the legal owner of the asset but the factory has control over it and bears the financial risks that it brings (Stewart et al, 2000).

When financial leases pay
Financial leases are agreement that pay in the long run. The lessee needs the assets that he has no ability to purchase. This lease agreement makes it possible for him to acquire the asset that he uses as if he has bought it. This means that the lessee has maximum benefits from the use of this asset though with a cost. The lessor on the other hand has the finances that need to be utilized to bring profit. This leasing agreement ensures that the lessor puts his finances into use and benefits from the interests charged to the lessee as well as the ownership of the asset. In that case the lessor does not suffer a loss as he has an asset at hand as well as profit that was received in the form of interest (Sullivan  Steven, 2003).

The lessee is also not at loss as he acquires the asset that he needed and puts it to use. The asset adds value to the organization of the lessee that leaves the lessee with profit after he has paid the lessor. In that case the asset brings a greater value than that which is paid of to the lessor leaving the lessee with a profit. The lessor on the other hand has his finances brought back in the form of the asset that he retains possession at the end of the agreement. Financial leases pay of in the sense that both the lessee as well as the lessor gain from the transaction though in different ways. Financial leases pay off to the lessee as he gets to use an asset that he had no access to with the aid of the lessor (Sullivan  Steven, 2003).

Conclusion
A lease is of much benefit to the parties that are involved as seen. However a lease agreement needs to be carefully evaluated to ensure that the lease is of benefit to each party. The evaluation is based on the value that the lease adds to the organization compared against that used in the facilitation of the lease.

The evaluation is what influences the decision to make the lease or to purchase the item. The financial position of the parties involved is also a factor that influences the decision greatly. Financial leases require much evaluation and can be seen as a great investment through which an organization can acquire an item. These are lease situations that are very beneficial to both parties involved.