How Do Leasing Companies Work?

Leasing companies offer a way for businesses and individuals to use assets without buying them outright. Some examples of assets that are offered by leasing companies include vehicles, construction equipment and office equipment. According to the U.S. Small Business Administration, 85 percent of all companies in the U.S. lease equipment, and 89 percent of these companies intend to lease more equipment in the future.

With all leases, the company offering a lease retains ownership of the asset being borrowed. However, there are several different types of leasing. The first is called a "direct lease." With a direct lease, the leasing company purchases an asset and offers it to the lessee. The lessee is able to use the asset for a prearranged amount of time, as long as the monthly lease payments are made. The second type of leasing is called "leaseback." With this kind of lease, the lessee already owns the asset. Instead of buying a new asset from an outside source, the leasing company purchases the asset from the lessee and leases it back to the original owner for a monthly fee.

Leasing companies offer different terms to different customers. These terms include the length of the lease, the required monthly payment and the permitted usage of the asset. Often, the length of the lease and the monthly payment are linked: Longer lease terms come with lower monthly payments, while short terms require higher monthly payments. Leasing companies often limit the type or amount of usage that is allowed. With vehicles, for instance, it is common for leasing companies to set mileage limits. If the lessee uses the asset in a way that violates the lease terms, additional fees may be charged.

Several options are typically offered by leasing companies when the term of a lease expires. If the lessee does not need to use the asset for more time, the item is simply returned. If the lessee still requires the asset, however, the lease can usually be renewed or extended. Many leasing companies also offer the lessee a chance to purchase the asset once the term has ended. If the lessee decides to buy the item at the end of a lease, they own it completely and no further monthly payments are required.

There are both advantages and disadvantages to leasing companies. Leasing companies allow lessees to increase their cash flow, and eliminate the need for users to pay large amounts of cash upfront. Leasing companies also allow lessees to use items without incurring debt. Because a lease is usually classified as an expense and not as a debt, lessees are able to keep their credit high. However, using a leasing company is typically more expensive over the long term than purchasing assets up front. Additionally, lessees do not have full legal ownership of the item being leased, and must be careful to follow the terms of the lease.