finance leases and covenants

one advantage of leasing to a lessee is that medium term quasi-borrowing can be taken outside borrowing covenants agreed with lenders .Rentals are not interest and will not be covered by standard interest cover covenants .
on the other hand ,finance leases do appear on balance sheet and are relatively easy to include in gearing covenants if broadly defined.
The fundamental point is that lease rentals are an important element in overall debt service and will have to be met if assets potentially crucial to a business is operations are to be retained.lenders need to ensure that their covenants are sufficiently widely drawn to encompass leasing obligations as well as normal borrowing.this should be relatively easy for finance lease obligations but is more difficult for operating leases as will be seen below.