Civil Engineering Practice

Presentation:

Leasing as a Source of Capital

Group: 04

Muhammad Abu-Turab B-16518

Harris Israr Khan B-16492

M. Shaheryar Naveed B-16574

Mian Abdul Basit B-16595

Leasing as a Source of Capital

By leasing, you're only buying the best years

and most trouble-free usage of the item.

Leasing or renting an asset is an effective source of debt-based capital. The most

common example is leasing office space. Instead of tying up cash in purchasing a

building or investing in leasehold improvements, most companies simply

execute a lease with a landlord.

Why Lease?

A lease is simply a financing contract, just like buying. But you only pay for the time that you

use the item rather than its total cost. Your initial cash outlay is significantly less, freeing

up the money to be used for other purposes. Your lines of credit and sources of capital aren't tied up in equipment. Instead, they're available for opportunities such as inventory, marketing, working capital or

personnel.

IMPORTANCE

Leasing allows you and your business the use of equipment that is vital to your success,

without having to own a depreciating asset or drain more of your operating budget than is already necessary. It costs less

initially and per month than buying, and has tax benefits that buying doesn't. When the term is over, you can walk away from

the equipment or buy it... with the advantage of having used it first to assure

that it meets your needs.

CONT.

Anyone who doesn't want to put their money into "depreciating" assets should be leasing. By paying cash

for your equipment, in time your purchase is worth consistently less, but you keep paying as though it were new. By leasing, you're only buying the best years and

most trouble-free usage of the item. As a business owner, you know that staying current with your support equipment can make all the difference, and by leasing you have more money available to take care of other

important operating expenses. There is significantly less paperwork with leasing and no complicated

depreciation schedules to maintain.

Leasing concepts

Before diving headfirst into leasing, brush up on the following key concepts and risks..

Risk of ownership

Real financing cost

Used versus new equipment

Risk of ownership

Most equipment leases are structured to transfer the risk of ownership to the lessee, so insurance, property taxes, maintenance, and so on all fall on the shoulders of the party leasing the equipment. But the leasing company has a secured interest in the asset being leased (to protect their interests).

In other words, in most cases, the leasing company retains legal title to the assets being leased. If the business (lessee) defaults on terms of the lease, the owner (the lesser) can repossess the asset.

Real financing cost

• Understanding the true cost of a lease in terms of the implied interest rate being charged is important.

• Leasing companies use all types of tricks and tactics to improve their returns, including requiring payments to be made in advance (for example, on the first day of the month rather tha the last), havi g the fi st a d last o ths’ lease payments made in advance, structuring fair-market value buyout options, and so on.

Used versus new equipment

Leasing is best utilized when the equipment is

new rather than used, because the interest

rate charged and the amount of lease

financing provided will be most favorable to

the lessee. That’s e ause the value of used e uip e t does ’t p ovide the lesse as much collateral as new equipment.

Attempting to secure lease financing on

used equipment is difficult and expensive.

Leasing vs. Bank Financing

Description DSC Lease Bank Financing

Interest Rate Fixed rates and

payments

Rates are usually

adjustable

Term Usually up to 5 years,

and up to 7 years over.

Usually 2-3 years, and

the bank must be made

whole annually

Down Payment 100% financing Typically 20-30% of total

cost

Financial Statements Not mandatory . Required on almost all

transactions .

Financial Reporting Not required to be

shown as debt on your

balance sheet

Carried on balance

sheet as debt

Leasing vs. Bank Financing Description DSC Lease Bank Financing

Sales Tax,

Installation,

Training,

Freight/Shipping

Leasing is 100% financing

and covers all of these

costs

Must be paid by your

o pa y i adva e… a add up to thousands

Hidden

Requirements

None Compensating balances,

other bank charges and

loan covenants

Tax Benefits Usually 100% deductible

over the term of the lease

Dep e iated ove the IRS’s useful life of the

equipment

Effective Cost Lower than bank financing

due to tax benefits,

lower/no down payment,

longer lease term and no

required compensating

balances

Higher cost due to longer

depreciation schedule,

larger down payment,

adjustable interest rate,

and other hidden charges

Leasing vs. Cash Is cash always King? Not always. Paying cash for equipment has

significant drawbacks when compared to leasing.

• Leasing should be used to acquire depreciable assets such as

equipment, so that available or excess cash can be spent on

things that are not traditionally financed such as sales,

marketing and personnel.

• Leasing preserves working capital

• Leasing protects obsolescence

• Leasing allows for the acquisition of equipment without a

substantial cash outlay

• Leasing offers tax benefits

• Leases can be custom-tailored with skip payments or deferred

payments for seasonal businesses

• Leasing permits upgrading equipment without impeding cash

flow

CONT.

Leases are most commonly structured with

assets that have an extended life, such as

buildings and capital equipment

(manufacturing equipment, furniture,

computers, autos, and so on). Structuring

leases for capital equipment are also used

extensively in the business community and

provided by numerous financing or leasing

companies.

Advantages And Disadvantages Of

Leasing

Advantages Of Leasing Acquisition of long-term assets requires huge cash outlay which is some times quite beyond the financial capacity of the actual user. In such a situation, the

user can lease such capital assets. Leasing serves as a long-term funding

that can be used for acquisition of capital assets. The advantages of

leasing are as follows:

1. Leasing Permits Alternative

Uses

A leasing arrangement provides a firm

with the use and control over the assets

without incurring huge capital

expenditure and requiring to make only

periodical rental payments. Thus,

leasing saves funds for alternative uses.

2. Leasing Arrange Faster And

Cheaper Credit

Leasing companies are generally more accommodating than banks and other financial institutes in respect of terms of financing. As such, it has generally been found that acquisition of assets under leasing arrangement is cheaper and faster as compared to acquisition

of assets through other sources of financing.

3. Leasing Increases Lessee's

Capacity To Borrow

Leasing arrangements enable the lessee

to use more of its own funds for

working capital purposes instead of

using low yielding fixed assets. The

debt-equity ratio of lease does not

alter because of assets acquired under

lease arrangements. As such lease

arrangements can resort to further

borrowings in case the need arises.

4. Leasing Protects against

Obsolescence

Lease arrangements helps to protect the

lessee against the risk of obsolescence

in respect of the assets which become

obsolete at a faster pace.

5. Boon For Small Firm

Acquisition of assets through a leasing

arrangement is particularly beneficial to

small firms which can not afford to raise

their capacity on account of scarcity of

financial resources.

6. Absence Of Restrictive

Convenience

The financial institution while lending

money usually attach several

restrictions on the borrowers as regards

management, debt-equity norms

declaration of dividends etc. Such

restrictions are absent in the case of

lease financing.

7. Trading On Tax Shield

In case of a non-tax paying lessee, the cost

of financing an asset is much higher as compared to a tax-paying lessee.

However, when tax-paying owns the assets, he generally passes a part of the

tax benefit to the lessee by means of lower rental charge. As a result of this favor, the real cost of the asset to the lessee, work out to be lower than that what it would have been if he were the

owner of the assets

Disadvantages Of Leasing Major disadvantages of leasing are as follows:

1. Deprived On Ownership a leasing arrangement, the lessee does not get the ownership of the asset. it gives only the right to use. As such, the lessee, cannot pledge the asset for securing loan from financial institutions.

2. Deprived Of The Asset IN Case Of Default

In case the lessee makes a default in rental payment, the lessor is entitled to take over the asset and the lessee has no right to prevent him from doing so.

Conclusions.

Leasing is a source by which companies can get more use of

their assets. Simply by consuming not more they can use that money in other purposes to increase the

quality of their products. For small firms, it is frequently being used. In 3rd word countries it has much

more importance.