Leasing: Definition, Types, Requirements and Process Stages

Leasing is a leasing business with various conditions that determine whether these leases can be carried out. Leasing is different from leasing in general, leasing provides the ability for the borrower to have the right to use goods and services for a predetermined period of time.

Leasing definition

Leasing is a leasing activity involving a contract between the lessor and the lessee regarding the leasing of an object. Leasing is also defined as the provision of costs in the form of the availability of capital goods to be used by lessees for a period of time that has been mutually determined through the terms of the agreement.

According to Rose (1996) leasing is a contract in which both parties, namely the owner and the borrower, agree on the right to use the goods on the borrower's side as a form of leasing which will be paid according to a specified period.

From a number of these definitions, we can see that, leasing is related to a leasing business carried out between the lessor (owner) and the lessee (tenant) based on the terms agreed by both of them.

Leasing Types

Leasing activities are distinguished based on two types of activities, namely:

1. Financial Leasing

Is a type of leasing that occurs in financial institutions, where the lessee requires a capital item by determining the specifications of the required item. This type of leasing allows lessees to make offers regarding prices, terms, quantities of goods and so on to suppliers or owners of goods (lessor).

More clearly in this type of financial leasing, the owner of the goods (lessor) has the right to benefit economically from the provision of his goods, while the lessee (lessee) has the right to own the goods and the owner of the goods (lessor) has the right to buy the residual value of leased items

2. Leasing Operative

This type of operative leasing is leasing where the owner of the goods (lessor) purchases an item and will lend the item to the lessee (lessee) for a certain period of time. The leasing operative does not determine the residual value of the goods that have been leased, this depends on the choice of the owner of the goods (lessor) after the agreement has ended. In this type of leasing, the lessee does not count how much has been spent by the owner of the goods.

Leasing Terms

To carry out leasing, it is necessary to agree and fulfill the terms of the agreement that occurs between the owner of the goods/provider of goods (lessor) and the lessee (lessee). The following requirements must exist to carry out leasing activities:

1. leasing object, are goods used as capital in a leasing agreement. 
2. Rent payments, is a payment made by the lessee (lessee) to the owner of the goods (lessor) in accordance with a mutually agreed time period. There is no fixed lease payment period, it depends on the agreement of both parties to determine the payment period.
3. Residual value of goods, is a determination stated in the leasing agreement to determine the residual value of the leased item. Where the item being leased will experience a reduction from the initial borrowing price, this is done based on a mutual agreement when the leasing agreement was made.
4. Option rights, is a leasing requirement that provides an alternative choice for the lessee (lessee) to determine whether to make a purchase of the goods that have been leased in accordance with the residual value of the goods or the goods will only be returned to the owner of the goods (lessor).
5. Lessors and lessees, is a party directly involved in leasing activities and makes an agreement that has been agreed on the leased goods.

Stages of the Leasing Process

Leasing activities generally have several stages to be achieved. The following are the steps that can be carried out with leasing activities:

1. There is negotiation between the owner of the goods (lessor) and the lessee (lessee) regarding the required capital goods. These negotiations usually involve discussions about the type of goods needed, the rental period, prices, specific types of goods, and so on.
2. The owner of the goods (lessor) has the goods needed by informing this to the lessee, here an agreement will occur regarding the terms and orders for these capital goods.
3. Leasing agreement through an order letter in accordance with the agreement regarding the specifications of capital goods required by the lessee. At this stage, the leasing has reached a sale and purchase agreement regarding the ownership of the goods.
4. The transfer of capital goods from the owner of the goods (lessor) to the lessee (lessee), after the goods have been delivered, it becomes the responsibility of the lessee to be able to take care of the goods in accordance with the agreed leasing agreement.
5. Making an agreement between the owner of the goods (lessor) and the lessee (lessee) completes the agreement to be agreed upon by both parties.
6. Determining the price of capital goods to be paid by the owner of the goods (lessor) to the supplier for the provision of capital needed by the lessee (lessee)
7. Determine the time period for payment of capital goods according to the agreement, this can vary depending on the outcome of the agreement. Sometimes there are leases that agree to pay every three months, six months and others. Usually this time period differs due to the functions and benefits of the capital goods used, things that are considered in determining the time of payment are the useful life of the goods, the location of the goods placement and the cash flow conditions of the lessee.
8. Determining the residual value of the goods at the time the leasing agreement was made, this is also an explanation at the end of the agreement. Usually the determination of the residual value of capital goods is in the range of at least 10% of the price of the goods, the lessee will also be given the option of whether to buy the goods or return them.

These are the stages of the process that occur in the leasing business, the leasing business is determined by the agreement that occurs between the owner of the goods (lessor) and the lessee (lessee) who need capital goods. 

Although leasing is related to the practice of leasing goods, the implementation procedure is different from leasing activities in general. That's all the information about leasing that you can learn from home, I hope this is useful!