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What is direct financing?
Direct financing is when an entity leasing equipment is neither a manufacturer nor a dealer of that equipment but wants to buy the equipment at the end of the lease. In the meantime, that entity leases out the equipment to another party instead of using it. At the end of the lease period, the business will own it and be free to lease it to someone else, if desired.
People or entities that are in the business of leasing equipment to a third party but are not in a position to buy the goods, can use direct financing to pay for their purchases. Direct financing, also known as direct lease, is essentially a non-leveraged lease.
Direct financing example
A computer consulting firm that specializes in a particular computer equipment brand wants to give clients updated equipment but is not in a position to buy the computers directly. It leases the computers from an outside firm through a direct financing lease in order to get the inventory it wants at an affordable price. It can then lease them out to clients to recover their lease payment and make a profit.
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