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Leasing and hire purchae

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Leasing and hire purchae

  1. 1. Leasing & Hire PurcHase Presented by:- Tushar Rathi 1
  2. 2. LEASING Introduction: • Leasing is distinguished from most other forms of finance by the fact that the financier (the lessor) is the legal owner of the leased asset. • The asset user (the lessee) obtains the right to use the asset in return for periodic payments (lease rentals) to the lessor. 2
  3. 3. Concept of Leasing • Leasing, as a financing concept, is an agreement between two parties, the leasing company or lessor and the user or lessee. • The rentals are predetermined and payable at fixed intervals of time, according to the mutual convenience of both the parties. • However, the lessor remains the owner of the equipment over the primary period. 3
  4. 4. Concept of Leasing • Leasing is an important source of finance for the lessee. Leasing Co. finance for:- – Modernization of business – Balancing equipment – Cars and other vehicles and durables – Assets which aren’t being financed by banks/institutions. 4
  5. 5. Origin & Development of Leasing • Since WW II, the use of leasing has been greatly expanded and is constantly used for new products and new industries. • Henry Scholfeld set up US Leasing Corporation with a capital of $20,000 in May 1952. • The concept of financial leasing was pioneered in India during 1973, First company was set up by Chidambaram 34
  6. 6. Legal Aspects Of Leasing • The delivery of goods by one person to another, • For some purpose, • When the purpose is accomplished, be returned or otherwise disposed of according to the directions of the person delivering them. • The person delivering the goods is called the ‘bailor’ and • The person to whom they are delivered is 6
  7. 7. Obligation For The Lesser And Lessee • The lesser has the duty to deliverthe asset to the lessee, • The lessee has the obligation to pay the lease rentals as specified in the lease agreement 7
  8. 8. Contents Of Lease Agreement • 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 responsibility for maintenance, repairs, registration, etc. 8
  9. 9. Contents Of Lease Agreement • Lessee’s right to enjoy the benefits of the warranties provided by the equipment manufacturer. • Insurance to be taken by the lessee on behalf of the lesser. • Variation in lease rentals. • Option of lease renewal for the lease period. • Return of equipment on expiry of the lease period. 9
  10. 10. 10
  11. 11. Factors Influencing Buying Lease Decision • Capital Adequacy • Liquidity Considerations • Flexible Considerations • Nature Of Asset • Debt Capacity • Grants And Incentive Considerations • Borrowing Restrictions 11
  12. 12. Types of Lease • Finance Lease • Operating Lease • Leverage Lease • Cross Border Lease – Vendor Leasing – Wet And Dry Lease 12
  13. 13. Financial Lease • A financial Lease is also known as Capital lease, Long-term lease, Net lease & Close lease • Under a financial lease, the rate of lease would be fixed based on the kind of lease, the period of lease, periodicity of rent payment, & the rate of depreciation & other tax benefits available. • The high cost of equipments such as office equipment, diesel generators, 13
  14. 14. Framework of finance lease • Lessee selects the equipment from the manufacturer or distributor and negotiates the terms of warranties, maintenance etc. Delivery, installation, the price and terms of payments. • The lessor purchases the equipment either directly from the vendor or from the lessee following the delivery. • Lessor retains ownership of equipment while the lessee enjoys the use. • The lease is for non-cancelable period, lessor 14
  15. 15. Operating Lease • An operating lease is also known as service lease, short-term lease or true lease. • The lease is for a limited period may be in a month, six months, a year or few years. • Normally, the lease rentals will be higher as compared to other leases on account of short period of primary lease. 15
  16. 16. Framework Of Operating Lease • Unlike in the case of financing lease, in an operating lease, the lessor leases same asset to different lessees successively after the expiration of each contract. • A single contract does not result in recovery of the capital cost in full. • This lease is usually for the period that is significantly shorter than the economic life of the equipment. • This lease is subject to cancellation by 16
  17. 17. • The lessor also relies on the residual value of the equipment to partly recover his investment. • In an operating lease, the lessor leases the equipment to many lessees over the equipments economic life. • Operating lease, are usually confined to equipments having an established used or have an active second market 17
  18. 18. Leverage Lease • A leverage lease is used for financing those assets which require huge capital outlay. • Asset has economic life of 10 years or more. • The Lessor acquires the assets as per the terms of the lease agreement but finances only a part of the total investment, say 20%-50% 18
  19. 19. Cross Border Lease • A vendor leasing is one where the retail vendors tie up with the lease finance companies which give financing option to the customers of the vendors to purchase a product. • This type of lease is popular in auto finance. –Vendor Leasing –Dry and Wet Leasing 19
  20. 20. Aircraft Leasing • Wet lease – Aircraft with complete crew, maintenance and Insurance – Lessee acts like air travel agent – Rent is paid by hours operated – Period of lease I from 1 to 24 Months 20
  21. 21. • Dry Lease – Aircraft without crew, maintenance etc – Typically used by Banks and Leasing Companies – Leasing period is more than 24 months 21
  22. 22. Problems of Leasing • Unhealthy Competition • Stamp Duty • Delayed payments • Bad debts • Higher Fixed Cost per month • Reduce return to Equity Shareholder • Complex processing and Documentation 22
  23. 23. Advantages of Leasing • Alternative use of funds A leasing arrangement provides a firm with the use and control over asset without incurring huge capital expenditure. • Fasterand cheapercredit Acquisition of assets under leasing agreement is cheaper and faster than any other source of finance. 23
  24. 24. • Flexibility Leasing arrangements may be tailored to the lessee’s needs more easily than ordinary financing. The lessee can utilize more funds for working capital needs. • Facilitates Additional Borrowings Leasing may increase long-term ability to acquire funds.. 24
  25. 25. • No restrictive covenants The restrictive covenants which are usually imposed under debenture or loan agreement are absolutely absent in a lease agreement. • Hundred percent financing Lease financing enables a firm to acquire the use of an asset without having to make a down payment. So, hundred per cent financing is assured to the lessee. • Boomto small firm It is a boom to small firms and technocrats who are able to make promoters contribution as 25
  26. 26. Disadvantages of Leasing • Lease is not a suitable mode of project finance • 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 capital gain. • The cost of financing is generally higher 26
  27. 27. • 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 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. 27
  28. 28. Hire Purchase Introduction: • Hire Purchase is the legal term for a contract, in which persons usually agree to pay for goods in parts or a percentage at a time. • When a sun equal to the original full price plus interest has been paid, the buyer may then exercise an option to buy the goods or return the goods to the owner. • The hire purchaser acquires the goods immediately on signing the hire purchase agreement but the ownership of the same is 28
  29. 29. Hire Purchase Act, 1972 • HP transactions are governed by the Hire Purchase Act 1972. • The HP Act sets out the forms and contents of HP agreements, the legal rights, duties, obligations of hirers and financiers. • The HP Act is administered by the Ministry of Domestic Trade and Consumer Affairs. • Hire purchase should be distinguished from installment sale wherein property passes to the purchaser with the payment of the first installment. 29
  30. 30. Development of hire purchase in India • In India, Hire purchase finance started only after WW I. • With the increase in economic activity, many Non-Banking financing companies entered the scene in the fifties and sixties. 30
  31. 31. Hire Purchase Agreement HP agreements must be in writing and signed by both the parties. They must clearly lay out the following information: • A clear description of the goods • The cash price for the goods • The HP price • The monthly installments • Rights to parties 31
  32. 32. Features Of Hire Purchase • Possession of goods • Each installment is treated as hire charges. • Ownership • Default in the payment • Terminate the agreement 32
  33. 33. Advantages Of Hire Purchase • Spread the cost of finance • Interest-free credit • Higher acceptance rates • Sales • Debt solutions 33
  34. 34. Disadvantages Of Hire Purchase • Personal debt • Final payment • Bad credit • Creditor harassment • Repossession rights 34
  36. 36. OWNERSHIP LEASING • In lease, ownership lies with the lessor. The lessee has the right to use the equipment and does not have an option to purchase. • Leasing is a method of financing business assets only. HIRE PURCHASE • In hire purchase, the hirer has the option to purchase. The hirer becomes the owner of the asset/equipment immediately after the last installment is paid. • Hire Purchase is a method of financing both business assets and consumer articles. 36 METHOD OF FINANCING
  37. 37. DEPRECIATION LEASING • In Leasing, depreciation and investment allowance cannot be claimed by the Lessor. • The entire lease rental is tax deductible expense. HIRE PURCHASE • In Hire Purchase depreciation and investment allowance can be claimed by the Hirer. • Only the interest components of the Hire Purchase installment are tax deductible. 37 TAX BENEFITS
  38. 38. SALVAGE VALUE LEASING • The lessee, not being the owner of the assets and does not enjoy the salvage value of the assets. • In Leasing the Lessee is not required to make any deposit. HIRE PURCHASE • The hirer, in purchase being the owner of assets and enjoy the salvage value of the assets. • In Hire Purchase, the Hirer is required to deposit 20% (or any other amount a per agreement) of the cost. 38 DEPOSIT
  39. 39. RENT-PURCHASE LEASING • In Leasing, the Lessee take the asset on a rent basis. • Lease financing is invariably 100% financing. It does not required any immediate HIRE PURCHASE • In Hire Purchase the asset is purchased by the Hirer. • In Hire Purchase, a margin equal to 20-25% of the cost of the assets to be paid the Hirer. 39 EXTENT OF FINANCE
  40. 40. MAINTENANCE LEASING • In Leasing, the maintenance of leased asset is the responsibility of the Lessee. • The leased assets are shown by way of footnote only. HIRE PURCHASE • In Hire Purchase, the cost of maintenance of hired assets is to be borne by the Hirer himself. • The assets on hire purchase is shown in the balance sheet of the Hire. 40 REPORTING
  41. 41. THANK YOU 41