AssetFund based financial services
Consumer credit and hire purchase finance.
Evaluation and forfeiting.
Venture capital financing.
Fee-basedadvisory services: stock broking, credit rating.
Concept of leasing:
Leasing, as a financing concept is an arrangement between
two parties, the leasing company or lessor and the user
lessee, where by the former arranges to buy capital
equipment for the use of the latter for an agreed period of
time in return for the payment of rent.
The rentals are predetermined and payable at fixed
intervals of time, according to the mutual convenience of
both the parties.
However, the lesser remains the owner of the equipment
over the primary period
A lease is defined as follows
-dictionary of business and managementLease is a form of contract transferring the use or
occupancy of land, space, structure or equipment, in
consideration of payment, usually in the form of a
–James c.van horne-
Leasing as a source of finance
Leasing is an important source of finance for the
Leasing companies finance for:
1. Modernization of business.
2. Balancing equipment.
3. Cars, scooters and other vehicles and durables.
4. Items entitled to 100% or 50% depreciation.
5. Assets which are not being financed by
The steps involved in leasing transaction are
summarized as follows:
First, the lessee has to decide the asset required and
select the supplier he has to decide about design
specifications, the price , warranties, terms of
delivery, servicing etc.
The lessee, then enters into a lease agreement with
The lease agreement contains the terms and
conditions of the lease such as
(a) the basic lease period during which the lease
(b) the timing in the amount of periodical enter payments
during the lease period.
(c) details of any option to renew the lease or to purchase
the asset at the end of the period.
(d) details regarding payment of cost of maintenance and
repairs, taxes, insurance, and other expenses.
After the lease agreement is signed the lessor
contacts the manufacturer and requests him
to supply the asset to the lessee. The lesser
makes payment to the manufacturer after
the asset has been delivered and accepted
by the lessee.
TYPES OF LEASE
DIFFERENCES BETWEEN FINANCIAL LEASE AND OPERATING LEASE
1. A financial lease is like an
installment loan. It is a legal
commitment to pay for the
entire cost of the equipment
plus interest over a specified
period of time. The lessee
with commits to a series of
payment which in total
exceed the cost of the
It excludes provisions for
maintenance or taxes which
are paid separately by the
1. An operating lease is a rental
agreement. The lessee is not
committed to paying more
than the original cost of
equipment during contractual
2. It provides for maintenances
expenses and taxes of the
The risk of obsolescence
is assumed by the lessee.
Contract period ranges
from medium to long
Contracts are usually
Air crafts land and
machinery are leased.
The lesser fulfills
1. Leasing company assumes
risk of obsolescence.
2. Contract period ranges
from intermediate to short
3. Contracts are usually
cancelable either by the
lesser / by the lessee.
4. Computers, office
automobiles ,etc., are
5. The lesser fulfills service
A leverage lease is used for financing those assets which
require huge capital outlay.
The outlay for purchase cost of the asset generally varies from
Rs.50 lakhs to Rs.2 crore and has economic life of 10 years or
more.The leverage lease agreement involves three parties, the
lessee, the lessor and the lender.The lessor acquires the assets
as per the terms of the lease agreement but finances only a
part of the total investment, say 20% to 50%.
The balance is provided by a person or a group of persons in
the form of loan to the lessor.
In leveraged lease, a wide range of equipments such as rail
road, rolling stock, coal mining, electricity generating plants,
pipe lines, ships etc. are acquired.
Sale and lease back
Under this type of lease, a firm which has an asset sells it to the leasing
company and gets it back on lease.
The asset is generally sold at its market value.
The firm receives the sale price in cash and gets the right to use the asset
during the lease period.
The firm makes periodical rental payment to the lessor.
The title to the asset vests with the lessor.
Most of the lease back agreements are on a net-net basis which means that the
lessee pays all maintenance expenses, property taxes and insurance.
In some cases, the lease agreement allows the lease to repurchase the property
at the termination of lease.
The sale and lease back agreement is beneficial to both lessor and lessee. The
lessor gets immediate cash which becomes available for working capital or for
further expansion and lessor gets tax benefits.
Retail stores, office buildings, multipurpose industrial building and shopping
centres are financed under this method.
Instalment buying ,Hire purchase
In installment buying, the property passes on to the buyer
immediately as soon as the first installment is made.
The balance amount is payable in installments.
Under the contract of installment the buyer has no right to
return the goods.
In case of default, the seller has the right to file a suit in
the court of law to recover his dues.
Hire purchase is an agreement under which the owner
delivers the goods to the buyer who agrees to make
periodical payment as hire charges.
The possession of goods vests with the hirer but the
ownership remains with the seller.
On full payment of hire charges, the buyer gets
the option of purchasing the goods.
On default, the seller can reclaim the goods,
subject to certain provisions of Hire Purchase Act.
Hire purchase resembles leasing in certain ways.
In both the cases the right to use the equipment is
transferred to the hirer/lessee.
Advantages of Lease
Permit Alternative Use of Founds
Faster and Cheaper Credit
Facilitates Additional Borrowings
Protection against obsolescence
No Restrictive Covenants
Hundred Percent Financing
Boon to Small Firm
Disadvantages of Leasing
Lease is not suitable mode of project finance.
This is because rentals are repayable soon after entering
into lease agreement while in new projects cash
generations may start only after a long gestation period.
Certain tax benefits/incentives such as subsidy may not be
available on leased equipment.
The value of real assets such as land and building may
increase during lease period.
In such a case the lessee loses the advantage of a potential
The cost of financing is generally higher than that of debt
A manufacturer who wants to discontinue a particular line
of business will not in a position to terminate the contract
except by paying heavy penalties. If it is a owned asset the
manufacturer can sell the equipment at his will.
If the lessee is not able to pay rentals regularly, the lessor
would suffer a loss particularly when the asset is a
sophisticated one and less liquid.
In case of lease agreement, it is lessor who has purchased
the asset from the supplier and not the lessee. Hence, the
lessee by himself is not entitled to any protection in case
the supplier commits breach of warranties in respect of the
In the absence of exclusive laws dealing with the lease
transaction, several problems crop up between lessor and
lessee resulting in unnecessary complications and
The lease agreement specifies the legal rights and
obligation of the lessor and the lessee.
It typically contains terms relating to the folowing:
Description of the lessor, the lessee, and the equipment.
Amount, time, and place of lease rental payments.
Time and place of equipment delivery.
Lessee’s responsibility for taking delivery and possession of
the leased equipment.
Lessee’s right to enjoy the benefits of the warranties
provided by the equipment manufacturer/supplier.
Insurance to be taken by the lessee on behalf of the lessor.
Variation in lease rentals if there is a change in certain
external factors like bank interest rates, depreciation rates,
and fiscal incentives.
Option of equipment on expiry of the lease period.
Arbitration procedure in the event of dispute.
Structure Of Leasing Industry
The present structure of leasing industry in India consists of
(i) Private Sector Leasing and
(ii) Public Sector Leasing.
The private setor leasing consists of :
(i) Pure Leasing Companies,
(ii) Hire Purchase and Finance Companies,and
(iii) Subsidiaries of Manufacturing Group Companies.
The public sector leasing organisations are divided into:
(i) Leasing divisions of financial intitutions,
(ii) Subsidiaries of public sector banks, and
(iii) Other public sector leasing organisations.
Hire purchase is a method of selling goods.
In a hire purchase transaction the goods are let out on hire by
finance company (creditor) to the hire purchase customer (hirer).
The buyer is required to pay an agreed amount in periodical
installments during a given period.
The ownership of the property remains with creditor and passes
on to hirer on the payment of last installment.
FEATURES OF HIRE PURCHASE
Under hire purchase system, the buyer takes possession of
goods immediately and agrees to pay the total hire
purchase price in installment.
Each installment is treated as hire charges.
The ownership of the goods passes from buyer to seller on
the payment of the installment.
In case the buyers makes any default in payment of any
installment the seller has right to repossess the goods from
the buyer and forfeit the amount already received treating
it as hire charge.
The hirer has the right to terminate the agreement any
time before the property passes. Then, he has the option to
return the goods in which case he need not pay
installments falling due thereafter. However, he can not
recover the sums already paid as such sums legally
represent hire charge on goods in question.
HIRE PURCHASE AGREEMENT
There is no prescribed form for a hire purchase
agreement, but it has to be in writing and signed by
both parties to the agreement.
A hire purchase agreement must contain the following
The description of goods in a manner sufficient to
The hire purchase price of the goods.
The date of commencement of the agreement.
The no. of installments in which hire purchase price is
to be paid, the amount, and due date.
HIRE PURCHASE AND LEASING
Hire purchase is also different from leasing:
ii. Method of financing.
iv. Tax benefits.
viii. Extent of finance.
BANK CREDIT FOR HIRE PURCHASE
The subsidiary of commercial banks lend to the dealer or to finance
intermediary who has already financed articles sold by the dealer to
the hirer under a hire purchase contract.
When offered this type of business, bank subsidiary would make an
assessment of the standing and financial position of the dealer or of
the hire-purchase company, and take into consideration the
principles of good lending and carry out the procedure below:
7. Monitoring and control.
A lot of working capital is tied up in the form of trade
debts. collection of debts, especially for the small –scale
and medium-scale companies is the biggest problem.
The average collection period has been on the increase.
Delays in collection process in turn lead to liquidity
problems and consequently to delay in production and
The increase in cost of capital reduces profit and
competitiveness of a company particularly the small ones
in the market.
Ultimately, the small unit may become even sick. To
overcome this situation, the factoring services has been
The word `factor` has been derived from Latin word
`facere` which means to make or to do. In other words it is
`to get things done. According to the Webster dictionary
`factor is an agent, as a banking or insurance company,
engaged in financing the operations of certain companies
or in financing wholesale or retail trade sales, through the
purchase of account receivables. Thus, factoring is
method of financing where by a company sells its trade
debts at a discount to a financial institution.
Rbert W. johnson in his books `financial managements`
states “factoring is a service involving the purchase by a
financial organization, called a factor, of receivables owned
to manufactures and distributors by their customers, with
the factor assuming full credit and collection
According to V.A. Avadhani, “factoring is a service of
financial nature involving the conversion of credit bills
In the words of kohok, factoring is an asset based means of
financing by which the factor buys up the book debts of a
company on a regular basis, paying cash down against
receivables, and then collects the amount from the
customers to whom the company has supplied goods.
As stated earlier the term `factoring` simply refers to
the process of selling trade debts of a company to a
financial institution. But, in practice, it is more than
that. Factoring involves the following functions:
Purchase and collection of debts.
Sales ledger management.
Credit investigation and undertaking of credit risk.
Provision of finance against debts, and
Rendering consultancy services.
Generally, a trade bill arises out of a genuine
credit trade transaction. The supplier of goods
draws s bill on the purchaser for the invoice price
of the goods sold on credit. It is drawn for short
period of 3 to 6 months and in some cases for 9
The buyer of goods accept the same and binds
himself liable to pay the amount on the due date.
In such cases, the suppliers of goods has to wait
for expiry of the bills to get back the cost of the
It involves locking up of his working capital which
is very much needed for smooth running of the
business or carrying on the normal production
Bill financing is superior to the conventional and
traditional system of cash credit in many ways.
First of all, it offers high liquidity, in the sense,
funds could be recycled promptly and quickly
It offers quick and high yield. The bankers gets
income in the form of discount charges at the time
of discounting the bills.
Again, there is every opportunity to earn the
spread between the rates of discount and
Moreover, bills drawn by business people would
never be dishonored and they are not subject to
any fluctuations in their values.
Cumbersome procedures to create the security
and positive obligations to maintain it are
comparatively very fewer
Even if the bills is dishonored, there is a simple
legal remedy. The bankers has to simply note and
protest the bill and debit the customer's account.
Bills are always drawn with recourse and hence, all
the parties on the instrument are liable till the bill
is finally discharged.
VENTURE CAPITAL FINANCING
MEANING OF VENTURE CAPITAL:
Venture capital is long-term risk capital to finance high
technology projects which involve risk but at the same
time has strong potential for growth.
Venture capitalist pool their resources including
managerial abilities to the assist new entrepreneur in the
early years of the project.
Once the project reaches the stage of profitability, they sell
their equity holdings at high premium.
DEFINITION OF VENTURE CAPITAL COMPANY :
A venture capital company is defined as “a financing
institution which joins an entrepreneur as a co-promoter
in a project and shares the risks and rewards of the
Features of venture capital
Some of the features of venture capital financing are as
Venture capital is usually in the form of an equity
participation. It may also take the form of convertible
debt or long term loan.
2. Investment is made only in high risk but high growth
3. Venture capital is made only for commercialization of
4. Venture capitalist joins the entrepreneur as a copromoter in projects and share the risk and rewards of
5. There is continuous involvement in business after
making an investment by the investor.
6. Venture capital is not just injection of money but also an
input needed to set-up the firm, design its marketing
strategy and organise and manage it.
7. Investment is usually made in small medium scale
SCOPE OF VENTURE CAPITAL
Venture capital may take various forms at
different stages of the project. There are four
successive stages of development:
1. Development of an idea-seed finance.
2. Implementation stage-start up finance.
3. Fledging stage-additional finance.
4. Establishment stage-establishment finance.
IMPORTANCE OF VENTURE CAPITAL:
It is of great practical value to every corporate
enterprise in modern times.
ADVANTAGES TO INVESTING PUBLIC:
The investing public will be able to reduce risk
significantly against unscrupulous management, if the
public invest in venture fund who in turn will invest in
equity of new business.
Investors or have no means to vouch for the
reasonableness of the claims made by promoters about
profitability of the business.
The investors do not have any means to ensure that the
affairs of the business are conducted prudently. The
venture fund having representatives on the board of
directors of the company would overcome it.
MEANING OF CREDIT RATING:
To understand the meaning of credit rating, let us look
at some definitions offered by well known rating agencies.
Moodys: Ratings are designed exclusively for the purpose
of grading bonds according to their investment qualities.
Australian ratings: A corporate credit rating provides
lenders with a simple system of gradation by which the
relative capacities of companies to make timely repayment
of interest and principal on a particular type of debt can
FUNCTIONS OF CREDIT
The credit rating firms are supposed to do the
1. Superior information
2. Low cost information
3. Basis for a proper risk-return trade off
4. Healthy discipline on corporate borrowers
5. Formulation of public policy guidelines on
BENEFITS OF CREDIT RATING
Low cost information
Quick investment decision
Independent investment decision
BENFITS TO RATED COMPANIES
Sources of additional certification
Increase the investors population
Encourages financial discipline
merchant bankers job made easy
Foreign collaborations made easy
Benefits the industry as a whole
Low cost of borrowing
Rating as a marketing tool