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Capacity is the ability of the lessee to honour his financial obligations to the lessor and other creditors as determined by the assessed viability of the business or intended use of the lease facility. This can be done by appraising the profits which are the main source of funds for servicing the lease rentals payments. Profits should be growing at an increasing rate or at least remain stable over time. The fixed charge coverage ratio is expressed as: Earnings…

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In any venture, the question of risk cannot be overlooked in the sense that the investor is taking the chance that the investment might not eventually yield the desired return or the actual cash flow might fall below expectation. Hence, in every investment particularly leasing, risk must be analysed. Risk may be defined here as the possibility that an expected stream of earnings or cash flows may have associated with it, the undesired chance of non-attainment. This non-attainment often…

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As a lessor (owner of asset), you have two objectives in arriving at IRR (interest rate) for lease: to be competitive and ensure adequate return to cover all cost and satisfy shareholders. To be competitive, you must always keep abreast of market rates and then attempt to stay within that range. There are two approaches to ensuring adequate return. The first which is commonly used is to take the average cost of debt, add the needed spread to stay…

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The assessment of the various risks confronted by a lessor (owner of an asset) continues with these: ADDITIONAL RISK ELEMENTS Several other risks may impact the credit decision but may not be apparent at the time of initial risk assessment. These risks are equally important and need to be fully considered. i. Funding Funding mismatch is a major risk that may affect the lessor’s operation. A lease may be financed on a fixed or variable rate basis. It is…

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In leasing, lessors (owner of an asset) are faced with two major types of risks: credit and asset risks. Before you as lessors commit into any lease transaction, it is imperative to conduct a proper analysis of the lessee (user of an asset) on these two types of risk. Lessor. having assessed the credit worthiness of the lessee, it is equally imperative to assess the other risks, which may confront the lessor. These include: (1)       OWNERSHIP RISK The lessor…

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What are the steps involved in the booking of lease? It has become necessary to detail the steps involved in the booking of leases as guide to lessors (owners of asset) who may not have had any experience in the business. In doing so, however, this rely on the approach used by a major bank and lessor in Nigeria. Before a lease is booked, the following minimum steps must be taken by the potential lessor: Request for a lease…

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