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Considering an operating lease?
Lease machinery, equipment and fit-outs from ₹25 lakh to ₹100 crore.
Check eligibilityWhat a lessor is
The lessor buys the equipment the lessee has chosen and lets the lessee use it. Its role in an operating lease comes down to four things.
1
Ownership: it pays the supplier and holds legal title to the asset for the whole lease term.
2
Funding: it puts up the capital and recovers it, with a return, through rentals and the asset's value at the end.
3
Credit review: before sanctioning a facility, it assesses the lessee's financials and track record.
4
Residual risk: it bears the risk that the asset is worth less at the end of the term than it assumed.
In return, the lessor sets terms that protect its asset: how it is used, maintained and insured, and the condition it must be in when it comes back.
When it applies
Funding equipment through a lessor is different from borrowing to buy it. The main differences sit in ownership, payments and risk.
WHAT CHANGES
Lessor
Lender (term loan)
Who owns the asset
The lessor
The borrower, with a charge to the lender
What is paid
Rentals for use of the asset
Principal and interest on the loan
Value at end of term
Lessor's risk in an operating lease
Borrower's risk
Upfront cash
Often little or none
Usually margin money
How a lessor prices a lease
A lessor sets rentals so that, over the term, it recovers the asset's cost less the value it expects to get back at the end, plus its cost of funds, its own costs and a margin. The lessee's credit and the type of asset both affect the result.
Cost and residual value.
The more the asset is expected to be worth at the end, the less the lessor needs to recover through rentals, so rentals can be lower.
Credit and tenure.
Stronger credit and a tenure that suits the asset's useful life generally support better terms. Weaker credit can mean a deposit or higher rentals.
Quotes from different lessors are easier to compare when tenure and end-of-term terms match.
Where it shows up
Funding forklifts and racking for a warehouse
ILLUSTRATIVE
A logistics company needs ₹5 crore of forklifts and racking for a new warehouse near Bhiwandi. The lessor reviews its audited financials, sanctions the facility and, once delivery is confirmed, pays the supplier ₹5 crore. The lessor now owns the equipment and collects rentals over the term. If the company returns the equipment at the end, the lessor must re-lease or sell it. If used forklifts are then worth less than the lessor assumed, that shortfall is the lessor's loss, provided the equipment comes back in the agreed condition.