Finance Leasing Manual - FLM1.22

Finance lessor's risk

Historically, finance lessors have generally taken a banker's turn on the deal. That is, the main or only risk they have been prepared to take is the risk that the lessee can't pay the rentals. Assuming the lessee remains sound, the lessor will get its 'loan' back with a commercial rate of 'interest'. The finance lessor is not dependent on being able to let the asset again, or to sell it, in the future.

However, there may be a trend towards greater risk-taking by lessors. For example, they may be prepared to take a chance that the value of the asset at the end of the lease (the 'residual value') will pay off part of the 'loan' and 'interest'. With some assets this may not involve much risk; for example, a fleet of cars tends to have, in the aggregate, a pretty predictable minimum residual value in two years' time. Alternatively, risk can be reduced by insurance arrangements.