(^374) Financial Management
is increased by the necessity for paying the warehouse concern; in addition, the inventory
must be transported to and eventually from the public warehouse.
The same warehouse receipt procedure described earlier for field warehouse loans is
used. Again, the cost of this type of financing can be quite high.
Lease Financing
Firms are generally interested in acquiring the use of equipment. One way to acquire
use is to buy the equipment. The same result can also be achieved by leasing the
equipment. A lease is a contractually established obligation by the lessee to pay the
lessor a series of payments for the use of certain assets. In this section we shell consider
types of leases, lease capitalisationís, and the advantages and disadvantages of leasing.
Type of Leases
There are two major types of leasesñoperating and financial.
Operating Lease. An operating or service lease is one that allows the lessee at his
convenience. Telephone service is an example of an operating lease. The telephone
user can, at his or her convenience, discontinue telephone service. Another example of
a service lease is leasing copying equipment from companies such as Xerox Corporation
and A. B. Dick Corporation. These companies typically lease their equipment on a 30
day cancellation notice basis. If a lessee cancels a service lease, the equipment is
leased to another lessee. The lessor expected to recover the costs plus profits over the
economic life of the equipment. Operating lease payments usually include charges for
servicing and maintaining the leased equipment.
Financial Lease. A financial lease is a non-cancelablle, contractual obligation of the
lessee to pay the lessor a fixed amount for a specified time period for the use of certain
assets. A financial lease includes the following features:
- The lease is non-cancelable. The lessee cannot ìwalk awayî from the lease without
becoming liable for the remaining lease payment. - The lease is fully amortised. A fully amortised lease is one that returns to the lessor
all his costs plus a reasonable return. - A financial lease does not include repair and maintenance services. A variation of
the financial lease in which the lessor pays the maintenance and insurance costs
is called a maintenance lease.
A special type of financial lease is a sale and leaseback arrangement. In a sale and
leaseback a firm sells an asset to another fir, who leases the asset back to the first firm.
Special features of a sale and leaseback arrangement are as follows: