final lease

8/3/2019 Final Lease

1/22

LEASING


2/22

Project Finance

Defined by the International Project Finance Association (IPFA) as the

following:

The financing of long-term infrastructure, industrial projects and publicservices based upon a non-recourse or limited recourse financialstructure where project debt and equity used to finance the project arepaid back from the cash flow generated by the project.

In other words, project financing is a loan structure that relies primarilyon the project's cash f low for repayment, with the project's assets, rights,and interests held as secondary security or collateral.

Project finance is especially attractive to the private sector because theycan fund major projects off balance sheet.


3/22

Sources of Finance Internal sources of finance

Personal savings

Retained profits

Working capital

Sale of fixed assets

External sources of finance Ownership capital

Ordinary shares

Preference shares Non-ownership capital

Debentures

Bank overdraft

Loan

Hire-purchase

Lease

Grant

Venture capital

Factoring

Invoice discounting


4/22

Choosing an appropriate source of finance

The factors that need to be considered when choosing anappropriate source of finance are:

The amount of money needed

The urgency of funds The cost of the source of finance

The risk involved

The duration of finance

The gearing ratio of the business

The control of the business


5/22

Lease Financing

Lease financing denotes procurement of assets through lease.

lease is a contract between the owner of an asset (the lessor) andits user (the lessee) for the right to use the asset during a specifiedperiod in return for a mutually agreed periodic payment (the lease

rentals).

The important feature of a lease contract is separation of theownership of the asset from its usage.

Lease financing is based on the observation made by Donald B.Grant: Why own a cow when the milk is so cheap? All youreally need is milk and not the cow.


6/22

Importance 0f Lease Financing

Leasing industry plays an important role in the economic development ofa country by providing money incentives to lessee.

The lessee does not have to pay the cost of asset at the time of signing the

contract of leases.

Leasing contracts are more flexible so lessees can structure the leasingcontracts according to their needs for finance.

The lessee can also pass on the risk of obsolescence to the lessor byacquiring those appliances, which have high technological obsolescence.

Today, most of us are familiar with leases of houses, apartments, offices,

etc.


7/22

Types Of Lease Agreements

Lease agreements are basically of two types.

They are

Financial lease and

Operating lease.The other variations in lease agreements are

Sale and lease back

Leveraged leasing and

Direct leasing.


8/22

Financial Lease

Long-term, non-cancellable lease contracts are known as

financial leases. The essential point of financial lease agreement is that it contains

a condition whereby the lessor agrees to transfer the title for theasset at the end of the lease period at a nominal cost.

Under this lease the lessor recovers 90% of the fair value of the

asset as lease rentals and the lease period is 75% of the economiclife of the asset.

The lease agreement is irrevocable.

Practically all the risks incidental to the asset ownership and allthe benefits arising there from are transferred to the lessee who

bears the cost of maintenance, insurance and repairs. Only title deeds remain with the lessor. Financial lease is also

known as capital lease.

In India, financial leases are very popular with high-cost and hightechnology equipment.


9/22

Operating Lease

An operating lease stands in contrast to the financial lease

in almost all aspects. This ease agreement gives to the lessee only a limited right

to use the asset.

The lessor is responsible for the upkeep and maintenance of

the asset. The lessee is not given any uplift to purchase the asset at

the end of the lease period.

Normally the lease is for a short period and even otherwise

is revocable at a short notice. Mines, Computers hardware, trucks and automobiles are

found suitable for operating lease because the rate ofobsolescence is very high in this kind of assets.


10/22

Sale And Lease Back

It is a sub-part of finance lease. Under this, the owner of an asset

sells the asset to a party (the buyer), who in turn leases back thesame asset to the owner in consideration of lease rentals.

However, under this arrangement, the assets are not physically

exchanged but it all happens in records only.

This is nothing but a paper transaction. Sale and lease backtransaction is suitable for those assets, which are not subjecteddepreciation but appreciation, say land.

The advantage of this method is that the lessee can satisfy himselfcompletely regarding the quality of the asset and after possessionof the asset convert the sale into a lease arrangement.


11/22

Leveraged Leasing

Under leveraged leasing arrangement, a third party is involved

beside lessor and lessee.

The lessor borrows a part of the purchase cost (say 80%) of the

asset from the third party i.e., lender.

The lender is paid off from the lease rentals directly by the lessee

and the surplus after meeting the claims of the lender goes to the

lessor.

The lessor, the owner of the asset is entitled to depreciation

allowance associated with the asset.

LESSOR LESSEE

LENDER


12/22

Direct Leasing

Under direct leasing, a firm acquires the right to use anasset from the manufacturer directly. The ownership ofthe asset leased out remains with the manufacturer


13/22

Essentials of Lease Financing

Parties to the contract

Lessor (the owner )

Lessee (the user)

Lease broker (who acts as an intermediary in arranging lease deals.)

Lease financier (who refinances the lessor)

AssetThe asset, property or equipment to be leased is the subject matter of a contract

of lease financing.

Ownership separatedfrom user

The essence of a lease financing contract is that during the lease-tenure,ownership of the asset vests with the lessor and its use is allowed to the lessee.

On the expiry of the lease tenure, the asset reverts to the lessor.


14/22

Lease Rentals

The consideration which the lessee pays to the lessor for the lease

transaction is the lease rental.

The lease rentals are so structured as to compensate the lessor for

the investment made in the asset (in the form of depreciation), the

interest on the investment, repairs/insurance if any borne by the

lessor, and servicing charges over the lease period.


15/22

Structuring of Lease Rentals

The lease rentals are structured to suit the lessors and the lessees.

From the lessee's angle, the structure of the lease rental should

synchronies with his operational cash flow pattern.

The dimensions of the synchronization between the lease rental

and the pattern of cash flows of the lessee are periodicity of

rentals, lease rentals in advance/arrear, profile of rentals and so

on.

The lease rentals should ensure a given/ expected return to the

lessor.


16/22

Advantages of Leasing to the Lessee

To the Lessee Lease financing has following advantages to the lessee:

Financing of Capital Goods Lease financing enables the lessee to have financefor huge investments in land, building, plant, machinery, heavy equipments, andso on, upto 100 per cent, without requiring any immediate down payment. Thus,the lessee is able to commence his business virtually without making any initialinvestment

Additional Source of Finance Leasing facilitates the acquisition of equipment,

plant and machinery,]without the necessary capital outlay, and, thus, has acompetitive advantage of mobilising the scarce in financial resources of thebusiness enterprise. It enhances the working capital position and makes available]the internal accruals for business operations.

Less CostlyLeasing as a method of financing is less costly than other alternativesavailable.

Ownership Preserved Leasing provides finance without diluting the ownershipor control of the promoters. As against it other modes of long-term finance, viz.equity or debentures, normally dilute the ownership of the promoters.


17/22

Advantages of Leasing to the Lessor

To the Lessor A lessor has the following advantages:

Full SecurityThe lessor's interest is fully secured since he is always theowner of the leased asset can take repossession of the asset if the lesseedefaults.

High ProfitabilityThe leasing business is highly profitable since therate of return is more than w" the lessor pays on his borrowings. Also,

the rate of return is more than in case of lending finance direct.

Trading on EquityLessors usually carry out their operations withgreater financial leverage. That is, they have a very low equity capital anduse a substantial amount of borrowed funds and deposits. Thus, theultimate return on equity is very high.

High Growth Potential The leasing industry has a high growthpotential. Lease financing enables the lessees to acquire equipment andmachinery even during a period of depression, since they do not have toinvest any capital. Leasing, thus, maintains the economic growth evenduring a recession.


18/22

Limitations of Leasing

Restrictions on Use of Equipment

Limitations of Finance Lease

Loss of Residual Value

Consequences of Default

Understatement of Lessee's Asset Double Sales Tax


19/22

Hire Purchase

Hire purchase is a type of installment credit under which the hire

purchaser, called the hirer, agrees to take the goods on hire at a

stated rental, which is inclusive of the repayment of principal as

well as interest, with an option to purchase.

Under this transaction, the hire purchaser acquires the property

(goods) immediately on signing the hire purchase agreement but

the ownership or title of the same is transferred only when the

last installment is paid.


20/22

Hire Purchase(Cont)

The hire purchase system is regulated by the Hire Purchase Act

1972. This Act defines a hire purchase as an agreement underwhich goods are let on hire and under which the hirer has an

option to purchase them in accordance with the terms of the

agreement and includes an agreement under which:

The owner delivers possession of goods thereof to a person on

condition that such person pays the agreed amount in periodic

installments.

The property in the goods is to pass to such person on thepayment of the last of such installments, and

Such person has a right to terminate the agreement at any

time before the property so passes


21/22

Diff. Between Lease Financing & Hire Purchase A lease transaction is a commercial

arrangement, whereby an equipment

owner or manufacturer conveys to the

equipment user the right to use the

equipment in return for a rental.

No option is provided to the lessee

(user) to purchase the goods. Lease rentals paid by the lessee are

entirely revenue expenditure of the

lessee.

Lease rentals comprise of 2 elements

finance charge

capital recovery.

Hire purchase is a type of installmentcredit under which the hire purchaser

agrees to take the goods on hire at a

stated rental, which is inclusive of the

repayment of principal as well as

interest, with an option to purchase.

Option is provided to the hirer (user).

Only interest element included in the

HP installments is revenue expenditure

by nature.

HP installments comprise of 3

elements normal trading profit

finance charge

recovery of cost of goods/assets


22/22

By-

Priyanka Chauhan

final lease

Documents