LEGAL VIEWPOINT: Leasing Vs. Term Loans by Dr AbdelGadir Warsama Ghalib, Legal Counsel, Bahrain

Dr AbdelGadir Warsama Ghalib, Principal Legal Counsel, Bahrain

The use of leasing has increased nowadays as a practical method for different businesses to acquire by leasing equipment and other assets. The number of companies in the leasing business has increased dramatically.  Leasing activity is now a billion-dollar industry. Commercial banks, insurance companies and finance companies do most of the leasing business.  We have noticed that, many of these organizations have formed certain subsidiaries primarily concerned with equipment leasing. These subsidiaries are usually capable of making lease arrangements for almost anything.

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In addition to financial organizations, there are companies which specialize only in leasing business. Some are engaged in general leasing, while others specialize equipment, such as trucks or computers, or some big equipment as planes or rigs or vessels. Equipment manufacturers are also occasionally in the leasing business. Of course, they usually lease the equipment they manufacture.

The obvious advantage to leasing is acquiring the use of an asset without making a large initial cash outlay. Compared to a loan arrangement to purchase the same equipment, a lease requires no down payment, while a loan often requires certain percent down payment. Leasing requires no restriction on company’s financial operations, while loans often do. Spreads payments over a longer period (as agreed between the parties) than loans permit and provides protection against the risk of equipment obsolescence since the lessee can get rid of the equipment at end of the lease. There may also be tax benefits and advantages in leasing. Lease payments are deductible as operating expenses if the arrangement is a true lease (this is the practice in certain countries such as America). 

Ownership of assets in contrast to leasing, however, usually has greater tax advantages through the investment tax credit and depreciation. Naturally, you need to have enough income and resulting tax liability to take advantage of those two benefits.

Leasing has the further good advantage that the leasing firm has acquired considerable knowledge about the kinds of equipment it leases. Thus, it can provide expert technical advice based on experience with the leased equipment.

Finally, there is one further advantage of leasing that you probably hope won’t ever be of use to you. In the event of bankruptcy, claims of the lessor to the assets of a firm are more restricted than those of general creditors.

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