Finance Lease: What Are They & How Do They Work?

Grip Invest
Grip Invest
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Nov 25, 2022
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    Financial and capital lease types and how it works.

    When it comes to wealth creation, there are many options available for investors. One such option that is becoming a hot favourite with many is Finance Lease.   A new source of wealth creation, Finance Leasing is when investors buy or lease assets for leasing companies for an agreed period. This is a contractual  mode of raising funds for startups who are trying to scale and investors looking for alternative financial growth. 

    Looking at the potential growth this ecosystem can support, Grip decided to merge the two portfolios of the lessee and the lessor to create a unified growth system. Let us understand this in greater detail here - 

    What is a Finance Lease?

    A finance lease is a form of investment in which the leasing firm purchases the item on behalf of the user and rents it to said user during the duration of the lease. The user is referred to as the lessor, while the leasing firm is referred to as the lessee. 

    The risks and benefits of asset ownership are essentially transferred to the lessee in a finance lease, also known as a capital lease. For a significant portion of its economic life, it is frequently used to purchase leased assets.

    A finance company is typically the legal owner of the asset for the duration of the lease in a finance lease, whereas the lessee not only has operating control over the asset, but also a portion of the economic risks and returns from changes in the value of the underlying asset.

    The asset will be listed in the lessor's general ledger as a fixed asset. The lessor will categorise the interest on the lease payment as a cost in this case.

    When a business cannot afford to make the initial capital commitment to purchase the equipment, they prefer to opt for a finance lease. 

    How do Finance Leases work?

    In essence, the lessee takes possession of the asset on behalf of the lessor and is paid back by the lessor through the course of the lease. They enter into a contract where the interest is received by the lessee as rental payments, and the upkeep, repairs, insurance, etc are managed by the lessor.

    To know how the process works, keep the following points in mind:

    1. The lessee gets the opportunity to select an asset that they require for their business.
    2. The lessor (owner) purchases the asset.
    3. Both lessor and lessee enter into a legal agreement according to which the lessee gets regular payments in exchange for use of an asset over an agreed period of time. 
    4. Companies are able to use leased assets to scale faster
    5. Investors are able to enjoy fixed, non-market linked, monthly returns 

    What are the benefits of a Finance Lease if you invest with Grip? 

    1. The duration of a finance lease with Grip is for a short term of 36 months
    2. You co-lease assets for only this short period of time
    3. In exchange, you get rental payment from the lessor
    4. A new investment option is thus created and anyone can purchase and lease on behalf of the company
    5. Investors get a proportionate share of returns and earn monthly non-volatile returns 
    6. Your investment portfolio will grow as you have essentially put your money in a passive income option
    7. The investment sum is only ? 10,000

    When should one choose investing in a Finance Lease?

    Leasing is a new age investment where you earn regular payment in exchange for an asset over an agreed period of time. Companies these days are working on asset light models. Assets demand huge capital, and instead of blocking their capital in purchasing assets like plants and machines, these companies get these assets on a lease. 

    A contractual agreement is reached where the companies make regular payment in exchange of using the asset over the agreed tenure. The most common assets are vehicles and furniture. Companies are scaling faster with leased assets and investors are earning non market linked, healthy fixed returns

    This is an investment opportunity in which you can earn up to 21% pre-tax IRR. 

    What should you evaluate before leasing 

    Before leasing there are some criterions that investors should go through to ascertain that their investment will be backing a safe company - 

    Financial check: It is important to analyse the annual report of the company. If the company has pending litigations, history of defaults then one needs to be prudent. It is important to read about and audit the number of existing lenders and other regulatory concerns.

    Quality of asset: Ensure that the  financed asset is 'core to its business’. 

    Corporate profile: Investors should do a thorough check of the founder/promoter, management team along with the portfolios of other investors and their track records. 

    To conclude…

    Lease investments on Grip is a unique way of growing your investments. It offers the opportunity of passive income. However before making any financial commitment, investors should read all the terms and conditions thoroughly. Although Grip performs due diligence on all companies involved in  asset leasinging on its platform, Grip encourages investors to audit all information provided by these companies.  Also, get informed on other exciting investment opportunities by visiting today. 





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