[ad_1]
Direct leasing involves a third party purchasing property and renting it to the lessee, with guaranteed lease payments and known costs. It is attractive for heavy machinery and offers advantages such as no depreciation concerns and a smaller initial cash outlay. It does not count against a company’s debt and may be more attractive to investors.
A direct lease is a financing arrangement whereby the lessor purchases the property and rents it directly to the lessee. In such cases, the owner of the property never really intends to use it directly for its intended purpose. Rather, it is simply a mechanism to invest for future profit.
A direct lease can be used when two criteria are met. The first condition that must be met is that the collection of the minimum lease payments be guaranteed. The second factor is that there cannot be any material uncertainty regarding the amount of non-reimbursable costs that may be incurred. In other words, both parties must know all the costs associated with the lease in advance.
Additionally, a direct lease differs from a traditional lease in that the lessor is not a manufacturer or dealer, but rather a third party who purchases the property. This can be a bank or some other type of investment company. Any lease that does not involve a third party cannot be considered direct.
In some ways direct leasing can be very attractive to a business that needs to get work done. This is especially true for heavy construction and manufacturing companies. In these cases, the equipment may not be very cheap. Instead of using it once in a while and paying for it even when idle, it may make sense to only use it when needed through a direct lease.
It is for this reason that heavy machinery can be a good candidate for this type of lease. Very few general contractors, for example, own their own cranes when working on taller construction projects. Rather, they specifically rent a crane from an owner who can provide the one he needs. Due to the fact that the owner of the crane is usually not a manufacturer or dealer, it can be considered a direct lease.
Direct leases offer a number of advantages. For example, one thing that companies constantly have to deal with is the depreciation value of equipment: since the company does not directly own equipment, this is not a concern. Also, this type of lease requires a smaller initial cash outlay than an outright purchase. This frees up valuable capital for other projects.
Also, while a direct lease is a business expense, it does not count against the company’s debt. Due to the fact that the company did not go into debt using the equipment, it may be more attractive to investors. At the very least, a lower debt load will help generate more favorable bond ratings. So in a way, this type of leasing is a way to incur debt without that debt actually counting against the company in other ways.
Smart Asset.
[ad_2]