18632726 leasing-and-hire-purchase contract in banking sector


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18632726 leasing-and-hire-purchase contract in banking sector

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18632726 leasing-and-hire-purchase contract in banking sector

  1. 1. LEASING AND HIRE PURCHASE TYBBI DEFINITION Leasing is a process by which a firm can obtain the use of a certain fixed assets for which it must pay a series of contractual, periodic, tax deductible payments. The lessee is the receiver of the services or the assets under the lease contract and the lessor is the owner of the assets. The relationship between the tenant and the landlord is called a tenancy, and can be for a fixed or an indefinite period of time (called the term of the lease). The consideration for the lease is called rent. Under normal circumstances, an owner of property is at liberty to do what they want with their property, including destroy it or hand over possession of the property to a tenant. However, if the owner has surrendered possession to another (ie the tenant) then any interference with the quiet enjoyment of the property by the tenant in lawful possession is unlawful. Similar principles apply to real property as well as to personal property, though the terminology would be different. Similar principles apply to sub-leasing, that is the leasing by a tenant in possession to a sub-tenant. The right to sub-lease can be expressly prohibited by the main lease. FINANCIAL SERVICES MANAGEMENT 1
  2. 2. LEASING AND HIRE PURCHASE TYBBI FEATURES Formality of a lease A tenancy for years greater than 1 year must be in writing in order to satisfy the Statute of Frauds. Term of a lease The term of the lease may be fixed, periodic or of indefinite duration. If it is for a specified period of time, the term ends automatically when the period expires, and no notice needs to be given, in the absence of legal requirements. The term's duration may be conditional, in which case it lasts until some specified event occurs, such as the death of a specified individual. A periodic tenancy is one which is renewed automatically, usually on a monthly or weekly basis. A tenancy at will lasts only as long as the parties wish it to, and be terminated without penalty by either party. It is common for a lease to be extended on a "holding over" basis, which normally converts the tenancy to a periodic tenancy on a month by month basis. Rent Rent is a requirement of leases in common law jurisdiction, but not in civil law jurisdiction. There is no requirement for the rent to be a commercial amount. "Pepper corn" rent or rent of some nominal amount is adequate for this requirement. Leasing of real property There are different types of ownership for land but, in common law states, the most common form is the fee simple absolute, where the legal term fee has the old meaning of real property, i.e. real estate. An owner of the fee simple holds all the rights and privileges to that property and, subject to the laws, codes, rules and regulations of the local law, can sell or by contract or grant, permit another to have possession and FINANCIAL SERVICES MANAGEMENT 2
  3. 3. LEASING AND HIRE PURCHASE TYBBI control of the property through a lease or tenancy agreement. For this purpose, the owner is called the lessor or landlord, and the other person is called the lessee or tenant, and the rights to possess and control the land are exchanged for some payment (called consideration in legal English), usually a monthly rent. The acceptance of rent by the landowner from a tenant creates (or extends) most of the rights of tenancy even without a written lease (or beyond the time limit of an expiring lease). Although leases can be oral agreements that are periodic, i.e. extended indefinitely and automatically, written leases should always define the period of time covered by the lease. In the 1930s, the British government introduced infinite leases, only to remove the power to create these in the early 1990s. A lease may be:  a fixed-term agreement, in other words one of these two:  for a specified period of time (the "term"), and end when the term expires;  conditional, i.e. last until some specified event occurs, such as the death of a specified individual; or  a periodic agreement, in other words renewed automatically  usually on a monthly or weekly basis  at will, i.e. last only as long as the parties wish it to, and be terminated without penalty by either party. Because ownership is retained by the lessor, he or she always has the better right to enforce all the contractual terms and conditions affecting the use of the land. Normally, the contract will be express (i.e. set out in full and, hopefully, plain language), but where a contract is silent or ambiguous, terms can be implied by a court where this would make commercial sense of the transaction between the parties. One important right that may or may not be allowed the lessee, is the ability to create a sublease or to assign the lease, i.e. to transfer control to a third party. Hence, the builder of an office block may create a lease of the whole in favour of a management company that then finds tenants for the individual units and gives them control. Under common law, a lease should have three essential characteristics: 1. A definite term (whether fixed or periodic) 2. At a rent 3. confer exclusive possession FINANCIAL SERVICES MANAGEMENT 3
  4. 4. LEASING AND HIRE PURCHASE TYBBI Leasing of tangible personal property An owner can allow another the use of a vehicle (such as vehicle leasing of a car, a truck or an airliner) or a computer either for a fixed period of time or at will. This can be a simple leasing transaction, or it can be a transaction intended to allow the user the right to buy the item at some future time.  In a simple lease (rental) of a car, P pays O a rental for the use of the car during the agreed period which may be a few days (e.g. for a holiday trip) or longer where it is more economic to pay for use rather than pay for the ownership of an asset of depreciating value. Normally, only P will be allowed to use the vehicle and, in such a case, P has possession and control. But, P could be an employer who allows C the use of the car to visit clients, and thereby gives C control.  In a lease with the possibility of purchase, O could allow P to lease the car for a specified period of time. If all the rental payments are made in full, P will then be allowed to buy the car at the contractual purchase option price. In a consumer lease subject to the federal Consumer Leasing Act and the Truth in Lending Act, the purchase option price can not be a "bargain" purchase, that is, it cannot be less than the originally estimated fair market value. A "bargain" purchase creates an installment sale, to which the Truth in Lending Act (TILA) applies including the standardized disclosures, most importantly the Annual Percentage Rate (APR). Typically, the vehicle dealer or other personal property seller offers the leasing terms and contract of a third party finance company. Hence, O leases the vehicle to P, and upon execution of the contract simultaneously sells ownership of the car to F and assigns the lease contract to F. It is standard for the contractual terms to prohibit P from parting with possession or control of the car to another (if P does part with possession, this can be a theft of the car from F). Real leases Whether it is better to lease or buy land will be determined by each state's legal and economic systems. In those countries where acquiring title is complicated, the state imposes high taxes on owners, transaction costs are high, and finance is difficult to obtain, leasing will be the norm. But, freely available credit at low interest rates with FINANCIAL SERVICES MANAGEMENT 4
  5. 5. LEASING AND HIRE PURCHASE TYBBI minimal tax disadvantages and low transaction costs will encourage land ownership. Whatever the system, most adult consumers have, at some point in their lives, been party to a real estate lease which can be as short as a week, as long as 999 years, or perpetual (only a few states permit ownership to be alienated indefinitely). For commercial property, whether there is a depreciation allowance depends on the local state taxation system. If a lease is created for a term of, say, ten years, the monthly or quarterly rent is a fixed cost during the term. The term of years may have an asset value for balance sheet purposes and, as the term expires, that value depreciates. However, the apportionment of relief as between business expense and depreciating asset is for each state to make (all that is certain is that the lessee cannot have a double allowance). Private property rental Rental, tenancy, and lease agreements are formal and informal contracts between an identified landlord and tenant giving rights to both parties, e.g. the tenant's right to occupy the accommodation for an agreed term and the landlord’s right to receive an agreed rent. If one of these elements is missing, only a tenancy at will or bare licence comes into being. In some legal systems, this has unfortunate consequences. When a formal tenancy is created, the law usually implies obligations for the lessor, e.g. that the property meets certain minimum standards of habitability. With a bare licence, some states do not imply any significant lessee protections A tenancy agreement can be made up of:  express terms. These include what is in the written agreement (if there is one), in the rent book, and/or what was agreed orally (if there is clear evidence of what was said).  implied terms. These are the standard terms established by custom and practice or the minimum rights and duties formally implied by law. FINANCIAL SERVICES MANAGEMENT 5
  6. 6. LEASING AND HIRE PURCHASE TYBBI Commercial leasehold Generally speaking in the modern legal framework, commercial real property leases fall into one of just a few categories: Office, Retail, Warehouse, Ground, and a catch-all hybrid often referred to as "Mixed Use". Each has certain typical characteristics, although Ground leases may differ somewhat, taking on some characteristics of Retail leasing when associated with a retail project, like a shopping center; and although Mixed Use projects can vary greatly depending upon the various inclusions and the size of the overall project, among other things. It is widely appreciated by those who specialize in commercial leasing, including the business side and the legal side, that, other than hybrids such as Mixed Use project leasing, Retail leasing can have the most complexity. Mixed Use projects often have elements of most or all of the other categories, not infrequently including a hotel, office building, ground floor retail with residential condominium above and a parking garage. The interplay of all these different components with each other and the underlying property documents which describe, define, and control their interactions, operation and management, as well as the division of costs for the operation of the site, are typically very complex. Retail leasing often requires the parties to address issues typically not addressed at all in other types of commercial leasing which have no retail component. These additional challenges include such topics as exclusives and restrictive covenants, radius restrictions on near-by self-competition, co-tenancy, no-build areas and visibility corridors, parking ratio assurances, signage concerns (including pylons, monuments, and criteria), CAM and CAM caps and controls (including the "cumulative" and "noncumulative" concepts), continuous operating covenants, and much more. Advantages of commercial leasing For businesses, leasing property may have significant financial benefits: FINANCIAL SERVICES MANAGEMENT 6
  7. 7. LEASING AND HIRE PURCHASE  TYBBI Leasing is less capital-intensive than purchasing, so if a business has constraints on its capital, it can grow more rapidly by leasing property than it could by purchasing the property outright.  Capital assets may fluctuate in value. Leasing shifts risks to the lessor, but if the property market has shown steady growth over time, a business that depends on leased property is sacrificing capital gains.  Because of investments which are done with leasing, new businesses are formed. Furthermore, unemployment in that country is decreased.  Leasing may provide more flexibility to a business which expects to grow or move in the relatively short term, because a lessee is not usually obliged to renew a lease at the end of its term.  In some cases a lease may be the only practical option; such as for a small business that wishes to locate in a large office building within tight locational parameters.  Depreciation of capital assets has different tax and financial reporting treatment from ordinary business expenses. Lease payments are considered expenses, which can be set off against revenue when calculating taxable profit at the end of the relevant tax accounting period. Disadvantages of commercial leasing For businesses, leasing property may have significant drawbacks:  A net lease may shift some or all of the maintenance costs onto the tenant.  If circumstances dictate that a business must change its operations significantly, it may be expensive or otherwise difficult to terminate a lease before the end of the term. If the business is successful, lessors may demand higher rental payments when leases come up for renewal. If the value of the business is tied to the use of that particular property, the lessor has a significant advantage over the lessee in negotiations. Leasing Internationally FINANCIAL SERVICES MANAGEMENT 7
  8. 8. LEASING AND HIRE PURCHASE TYBBI The practice of leasing is well established in most countries of the world . However the benefits (in particular the tax benefits) to the lessee and lessor will vary widely depending on national accounting standards and tax regulations. These largely divide into countries observing:  Legal Form: the lessors legal ownership of the property. or  Substance: the lessee legal right to use the property. National accounting standards vary in the tests that decide if the lease is a:  Capital or Finance Lease, which is considered a financing transaction - as the lessor has less of the risks of ownership, such as the value of the equipment in future years.  Operating Lease, whose term is short compared to the useful life of the asset, where the lessee does not have to show the lease on their balance sheet. FINANCIAL SERVICES MANAGEMENT 8
  9. 9. LEASING AND HIRE PURCHASE TYBBI Pros and cons of leasing by the way of example Buying a vehicle is a fairly straightforward process. You borrow money from a lending institution, pay the dealership for the car, and then make monthly payments on the loan until it's paid off. As you pay off the loan, you gain equity in the vehicle until it's eventually all yours. You can keep the vehicle as long as you like and you can do whatever you want to it, from giving it a custom paint job to entering it in a demolition derby. The only penalty for modification or abuse, perhaps, is a lower resale value when you're done with it. On the surface, leasing appears even simpler. You pay the leasing company a monthly payment that's lower than when buying. Then, after enjoying the most trouble-free two or three years of the vehicle's life, you simply bring it back to the dealership and lease another new one, or walk away. No muss, no fuss, right? Gone are your worries about haggling over the trade-in value or how to sell your old car. With a lease, that new-car smell need never leave your nostrils. Moreover: There's often no down payment required when leasing, or only a low one. You can drive a higher-priced, better-equipped vehicle than you might otherwise be able to afford to buy. You're always driving a late-model vehicle that's usually covered by the manufacturer's warranty. These benefits are very inviting for many people. Still, there are a number of compromises and disadvantages to leasing, which means that it's not right for everyone. Once you're in the leasing habit, monthly payments go on forever. You have a limited number of miles in your contract and will have to pay extra if you go over. You must maintain the vehicle in good condition. If you don't, you'll have to pay penalties for excess wear and tear when you turn it in. If you need to get out of a lease before it expires, you may be stuck with thousands of dollars in early-termination fees and penalties--all due at once. FINANCIAL SERVICES MANAGEMENT 9
  10. 10. LEASING AND HIRE PURCHASE TYBBI Leasing is rarely a better financial arrangement than buying. The financial advantage of buying increases the longer you keep the vehicle after the loan is paid off. At the end of the lease, you have no equity in the vehicle to put toward a new car. You can't customize your vehicle in any permanent way. In addition, arranging a lease can be a confusing, complicated process that can easily leave you paying more than you should. This is not to say that leasing can't be a satisfying and cost-effective way to acquire a new vehicle. But it's a mistake to think that leasing is always easier or less expensive than buying. FINANCIAL SERVICES MANAGEMENT 10
  11. 11. LEASING AND HIRE PURCHASE TYBBI TYPES OF LEASE While many leasing companies may use the same name to describe a lease, the actual terms and conditions written in their contracts often vary. At Access Equipment Leasing, we always recommend you carefully review any leasing documents and ask your leasing company or Access Equipment Leasing to explain anything that is unclear. True Lease or Operating Lease Best For: Equipment that will rapidly depreciate or become obsolete in a short period of time - i.e. some forms of computer equipment. How It Works: In a true or operating lease, the leasing company retains ownership of the equipment during the lease. True or operating leases typically have no predetermined buyouts - customers usually classify these payments as an operating expense. Benefits: Lower payments and typically the most tax-friendly form of leasing, Additionally, true or operating leases offer three choices at the end of your lease: · return the equipment to the leasing company, · purchase the equipment at its fair market value or option amount · extend your lease term. Finance Lease or Capital Lease Best For: If you would prefer to own the equipment when the lease agreement ends. How It Works: The full purchase price, plus interest, is spread over the length of the lease agreement. Benefits: At the end of the lease, you own the equipment for a minimal payment, usually $1.00 or a small percentage of the original purchase price. Skip Lease Best For: Seasonal businesses, agricultural companies, recreational services firms, and other organizations which might require a more flexible payment schedule due to seasonal business conditions. How It Works: You specify the months when you would prefer not to make payments. Benefits: Flexible, in that it can be adjusted to irregular cash flow. FINANCIAL SERVICES MANAGEMENT 11
  13. 13. LEASING AND HIRE PURCHASE TYBBI Sale-Leaseback Best For: Customers who have purchased their equipment, but now have decided that leasing would be more beneficial. Sale-leaseback also allows companies to raise cash for other investments or cash flow purposes. How It Works: The business that has already purchased equipment sells it to a leasing company, which then takes ownership of the equipment and leases it back to the business. Access Equipment Leasing requires that the equipment be purchased within 90 days. Benefits: The sale-leaseback allows you to put money back into your business or into investments that appreciate rather than depreciate. 60 or 90-Day Deferred Lease/ leveraged Best For: Businesses that need equipment for operation and development that will not immediately generate revenue. How It Works: A 60 or 90-day deferred lease can be structured as a finance lease or a true lease. With this form of lease, there is usually no advance payment required, and the first payment is not due for 60 or 90 days after the lease begins. Benefits: The equipment you need can be acquired with little to no money up front and no payments for 2-3 months. Master Lease Best For: If your leasing requirements will likely be expanding over time. How It Works: Separate lease schedules are created to accommodate the addition of equipment over a period of time of your specification. The master lease governs the basic terms and conditions. Benefits: Acquiring additional equipment is made more convenient. Municipal Lease Best For: Local and state government organizations that wish to acquire equipment. How It Works: The tax structures and details of municipal leases will vary considerably from standard business leases. Seek the advice of your financial advisor to better understand your municipal lease options. Benefits: Municipal leases are designed specifically for local and state government organizations. Step Up Lease Best For: Businesses whose financed equipment will allow more profitability over a period of time. How It Works:Payments increase according to a regular schedule over the life of the FINANCIAL SERVICES MANAGEMENT 13
  14. 14. LEASING AND HIRE PURCHASE TYBBI lease. Benefits: Payments can be structured to match current cash flow LEASING IN INDIA  Leasing has grown by leaps and bounds in the eighties but it is estimated that hardly 1% of the industrial investment in India is covered by the lease finance, as against 40% in USA and 30% in UK and 10% in Japan.  The prospects of leasing in India are good due to growing investment needs and scarcity of funds with public financial institutions.  This type of lease finances is particularly suitable in India where a large number of small companies have emerged more recently.  Leasing in the sphere of land and building has been in existence in India for a long time, while equipment leasing has become very common in the recent times. FINANCIAL SERVICES MANAGEMENT 14
  15. 15. LEASING AND HIRE PURCHASE TYBBI Lessors 1. Specialized leasing companies: There are about 400-odd large companies which have an organizational focus on leasing, and hence, are known as leasing companies. Till recently, most of them were diversified financial houses, offering several fund-based and non-fund based financial services. However, recent SEBI rules on bifurcation of fund-based and non-fund based activities has resulted into hiving-off of merchant banking divisions of these entities. Most of these companies also offer hire-purchase activities, and some of them might have a consumer finance division as well. 2. Banks and bank-subsidiaries: Till 1991, there were some ten bank subsidiaries active in leasing, and over-active in stock-investing. The latter variety was ravaged in the aftermath of the 1992 securities scam. In Feb., 1994, the RBI allowed banks to directly enter leasing. So long, only bank subsidiaries were allowed to engage in leasing operations, which was regarded by the RBI as a non-banking activity. However, the 1994 Notification saw an essential thread of similarity between financial leasing and traditional lending. Though State Bank of India, Canara Bank etc have set up leasing activity, it is not currently at a scale to make any difference on the leasing scenario. This is different from the rest of the World, where banks are front-runners in leasing markets. 3. Specialized Financial institutions: There is a wide variety of financial institutions at the Central as well as the State level in India. Apart from the apex financial institutions, viz., the Industrial Development Bank of India, the Industrial Finance Corporation of India, and the ICICI, there are several financing agencies devoted to specific causes, such as sick-industries, tourism, agriculture, small industries, housing, shipping, railways, roads, power, etc. In most States too, there are multiple financing agencies for generic or focussed cause. 4. One-off lessors : FINANCIAL SERVICES MANAGEMENT 15
  16. 16. LEASING AND HIRE PURCHASE TYBBI Some of the companies engaged in some other business which gives them huge taxable profits, have resorted to one-off leasing on a casual basis to defer their taxes. These people are interested only in leasing of high-depreciation items, preferably those entitled to 100% depreciation. . 5. Manufacturer-lessors : This part of the lessor-industry is in highly under-grown form in India, for simple reasons. Vendor leasing is a product of competition in the product market. As competition forces the manufacturer to add value to his sales, he finds the best way to sell the product is to sell it without the buyer having to pay for it instantly. Product markets so far for most durables were oligopolistic, and good products used to sell even otherwise at a premium. With the economy decisively moving towards market orientation, competition has become inevitable, and competition brings in its wake sales-aid tools. Hence, the potential for vendor leasing is truly great.Presently, vendors of automobiles, consumer durables, etc. have alliances or joint ventures with leasing companies to offer lease finance against their products. However, there is no devoted vendor leasing of the type popular in most of the advanced markets, where a specific leasing company or leasing program takes exclusive charge of a vendor's products. The lessees a. Corporate customers with very high credit ratings: These essentially look at leasing to leverage against assets which are otherwise not bankable, or for pure junk financing. b. Public sector undertakings: This market has witnessed a very rate of growth in the past. With budgetary grants to the PSUs coming to a virtual halt, there is an increasing number of both centrally as well as State-owned entities which have resorted to lease financing. Their requirements are usually massive. c. Mid-market companies: The mid-market companies, that is, companies with reasonably good creditworthiness but with lower public profile have resorted to lease FINANCIAL SERVICES MANAGEMENT 16
  17. 17. LEASING AND HIRE PURCHASE TYBBI financing basically as an alternative to bank/institutional financing, which to them is time-consuming and tedious. d. Consumers: Retail funding for consumer durables was frowned-upon at one point of time, but recent bad experience with corporate financing has focussed attention towards consumer durables which incidentally, is all the all-time favorite of financiers World-over. Most of the larger companies have expressed interest in consumer funding, with ticket size going as low as Rs. 5000. e. Car customers: Car leasing World-over is a very big market, and the same is true for India. So long, most car leases were plain-vanilla financial leases but one now finds few instances of value-added car lease services also being offered. f. Commercial vehicles: Commercial vehicles customers have always relied upon funding by hire-purchase companies. The customer profile ranges from large fleet owners to individual truckers. g. Earth-moving machinery customers: These customers have also traditionally relied upon lease financing. Their requirements are generally large - each excavators costs more than Rs. 25 lacs. The income-stream is based on contracts they have - at times, the income generation may be sporadic, or the need might itself be temporary. In fact, operating leases would have been ideal in this market, but they are yet to be launched to any serious degree. i. Govt. depts. and authorities: One of the latest entrants in leasing markets is the Govt. itself. The Depts. of Telecommunications of the Central Govt. took the lead by floating tenders for lease finance worth about Rs. 1000 crores. In its reforms programme, India has limits to the extent to which it can resort to deficit financing, and leasing is easily going to appeal to the Govt. , if not for cost reasons, at least for the fact that it will not feature in national accounts as a commercial financing. As a spinoff, it might even help reducing the reported deficit, as the Govt. resorts to what is loved World-over as a tool of off-balance-sheet financing. FINANCIAL SERVICES MANAGEMENT 17
  18. 18. LEASING AND HIRE PURCHASE TYBBI EQUIPMENT LEASING Is Equipment Leasing The Right Choice For You? Not all businesses have sufficient start-up capital. In addition, not all established businesses have enough money to support all expenses necessary for expansion. So the question is, is equipment leasing the right choice for you? To answer this question, let us consider the benefits of leasing equipment over purchasing. But first, what is equipment leasing? Equipment leasing simply means renting business equipment. Instead of obtaining a loan to purchase equipment, equipment leasing lets you use the FINANCIAL SERVICES MANAGEMENT 18
  19. 19. LEASING AND HIRE PURCHASE TYBBI equipment and start operating the business without the need for down payment or cash payment. Payment may be done in monthly installments or yearly payments depending on the type of lease you’ve obtained. So what makes equipment leasing advantageous over purchasing? First of all, it doesn’t repress cash flow. With purchasing, a business is forced to give up a huge portion of its finances to buy expensive equipment. It can take some time before a business can regain the amount of money used for buying equipment. On the contrary, equipment leasing allows a business to start manufacturing and managing the business without the need to dispel big cash. Thus, there would sufficient cash available to support other areas of the business. Leasing equipment presents different types of leases for every business. Those businesses that are operates on a seasonal basis can avail of a “skip lease” where skipping payments during slow seasons are allowed without any penalties. There is also a type of lease called “step-up” lease where businesses who are just starting up can defer lease payments until the business gains footing. These are just two examples of leasing terms which are available for a business. Every equipment leasing company offers different types of lease that each business can consider before taking their pick. Equipment leases are tax deductible. Lease payments can be considered as a business’s monthly expense which makes it a hundred percent tax deductible. Every business owner who leases equipment should remember this important fact and inquire from their lawyers or accountant on how they can avail the tax deduction. Another great advantage about leasing business equipment is that it lets you keep up with technology. Machines and equipment are constantly and continuously enhanced. A particular device can be outdated or get obsolete in just a few years. If you purchased the equipment, it wouldn’t be practical to buy the latest model and throw out the money you spent on that equipment. If you leased the equipment, you can easily trade your current equipment and replace it with the latest model in the market. It is also worth mentioning that applying for an equipment lease is so much easier than trying to obtain a loan. Commercial banks and lending institutions generally have strict policies and procedures before granting a loan approval. In most cases, an excellent credit history is required to qualify. A business plan must also be presented in order to get approved. Equipment leasing companies do not impose such requirements from their clients. Usually, leasing companies only consider the last six months of an individual’s credit history. Equipment Leasing and Expanding Your Business FINANCIAL SERVICES MANAGEMENT 19
  20. 20. LEASING AND HIRE PURCHASE TYBBI The challenge of business financing isn’t just for new businesses. A growing business can also encounter the same challenges as a new business does. When it’s time to expand the business, an entrepreneur may choose to apply for a traditional business loan or seek out more conventional methods of business financing. In this article, we will discuss how equipment leasing can help with your plans of expanding the business. What is Business Equipment Leasing? We all know that a growing business needs additional machineries, equipment, and vehicles to carry on its expansion. Without sufficient funds, expanding the business can prove to be very difficult. Consequently, buying new business equipment can eat up a very large percentage of the company’s budget and there may not be much left to cover other expenses. By leasing business equipment, the cost is significantly cut off so that the money can be used for other areas of financing. Almost any type of device, machinery, equipment can be leased. Leasing companies also offer vehicles for lease such as delivery vans, trucks, trailers, etc. Any type of business-regardless of which industry it belongs can enjoy the benefits that equipment leasing offers. Another term for equipment leasing is “renting equipment”. In other words, the necessary equipment does not need to be purchased. Machinery or equipment would instead be “leased” or “rented”. Rather than submitting a huge, one-time payment for the purchase of equipment, the business owner has the option to obtain the devices needed and pay lower, monthly installments. There is also no need to give a down payment and since the equipment was not purchased, there’s no need to pay additional tax fees. More Reasons to Lease Your Business Equipment What are other benefits of leasing? For one, a business does not need to spend a fortune just to get access to the latest and state-of-the-art equipment in the market. Whether you have limited funds or not, leasing enables you use only the best equipment for your business. This can certainly make a big difference in your business performance. Using the most advanced equipment should help your business keep up with your toughest competitors. Leasing also eliminates the risk of obsolescence. Any time you want to exchange the equipment you leased for new and better devices, you can do so without worrying about your budget. When your lease term ends, you have the option to keep the FINANCIAL SERVICES MANAGEMENT 20
  21. 21. LEASING AND HIRE PURCHASE TYBBI equipment you leased for a low payment or simply return them to your lessor with no further obligations. Another thing that makes equipment leasing a practical business financing option is its fast and convenient processing. Leasing companies allow businesses to submit their applications online and get an approval within the same day or within just minutes. At the most, a business can expect to receive the equipment it leased within a week or two. For a business owner who plans to expand his company, equipment leasing is definitely worth considering. Take advantage of the opportunity to see your business grow at the most minimal cost possible through this wonderful financing option. Where to Find a Business Equipment Lease Company You can do a survey or ask for suggestions from other business owners in your locality. If you have friends or relatives who are also running their own companies, why not ask them for possible recommendations. You can also explore your choices through the internet as many business leasing companies advertise their services online. Comparing online will give you a better idea as to the average pricing rate that most leasing companies offer. When doing your search, do not overlook smaller leasing firms and independent business equipment lessors as they may provide good service for a smaller cost. As long as you check their background and reputation, you may be able to work out a good partnership with a smaller lease firm. The important thing to remember is to carefully study your lease contract before signing up your application. Take note that the specific lease terms and rules will vary from one leasing company to another. Therefore, take time to read and understand the Agreement before making your final decision. How to Get Approved For an Equipment Lease Many companies provide leasing services on equipment, vehicles and special machines for large businesses and small businesses alike. Leasing equipment is generally quicker and uncomplicated compared to other business financing options. Below are practical advices on how you can get an easy approval for business equipment lease: Tips On How To Get A Fast Equipment Leasing FINANCIAL SERVICES MANAGEMENT 21
  22. 22. LEASING AND HIRE PURCHASE TYBBI Starting your own small business can be a challenge especially when you think about the machines and equipment you would need. Even setting up a home office needs quite a big amount of budget to acquire basic equipment such as computers, fax machines, copiers, printers, and others. However, the absence of a large start up business funding should not be a problem. Today, aspiring small business owners have the option to lease business equipment especially when they don’t have a big budget to spend. Where can you avail of business equipment leasing services? There are three main providers of business equipment leasing in the industry. They are captive leasing companies, brokers and independent lessors. Larger corporations usually turn to captive leasing companies for equipment while smaller businesses may turn to brokers and independent lessors. Banks and equipment leasing companies are examples of independent lessors. On the other hand, brokers are usually individuals who provide assistance for those who want to lease business equipment. Brokers simply coordinate with banks and equipment leasing companies to help a certain business process a leasing arrangement. If you don’t know much about leasing procedures, a broker can help you find a good leasing deal for your business. If you wish to acquire business equipment leasing, it would be better to do some research yourself. Check out the internet for possible equipment leasing companies you can apply to and study the leasing terms they offer. Choosing a leasing term will depend on the nature of your business and on your financial situation so it’s best to get an accurate idea about your options. Even if you’re coordinating with a broker, make sure that you check the information yourself to be able to come up with an informed decision. If you own a small company and is planning to lease business equipment, this is a timely article for you. Below is a practical guide on how you can get a fast approval from your equipment leasing application: Prepare all necessary documentations. Do research as to what specific documents you need to submit to the leasing company. Knowing this important information can save you precious time and will ensure that your lease application won’t get denied. Many business equipment leasing providers require the submission of a business plan. This plan should contain information about your company, a description of your business, a list of the equipment you wish to lease, your credit report, references, projected expenses, earnings, etc. FINANCIAL SERVICES MANAGEMENT 22
  23. 23. LEASING AND HIRE PURCHASE TYBBI Hiring a Certified Public Accountant is an advantage when preparing your financial statement especially if you had been in operations for more than a year. Contact your prospective leasing company and ask for the exact lease requirements. Request and review possible quotes. The best way to compare different business equipment lease providers is to ask for quotes. Compare the prices as well as the choices of repayment terms offered by the company. Provide a number of credible references. An equipment lease provider will be more confident to give you an approval if you include trusted references in your lease proposal. Reviewing your record of transactions with suppliers or business-to-business companies will prove your capacity as a lessee. Make sure that the references you’ll provide are in good terms with your company. Have an attorney review the contract. Before signing up your lease contract, it is advisable to have a lawyer review the terms and conditions in your behalf. Bear in mind that once you’ve signed the contract, you will be bound by the conditions of your lessor. Check your business’s credit history. It’s also a wise step to check your business credit history before submitting your lease application. This way, you can avoid the risk of rejection in case your credit rating needs improvement. Consider paying through ACH Debiting. ACH Debiting is an arrangement that involves three parties -you, your bank and your leasing company. Under this arrangement, payments will be automatically sent to your leasing company according to the payment schedule in your contract. This minimizes the risk of delays or missed payments. As much as possible, make way for actions that will enhance your credit. FINANCIAL SERVICES MANAGEMENT 23
  24. 24. LEASING AND HIRE PURCHASE TYBBI CONCEPT AND MEANING OF HIRE PURCHASE Hire purchase is a type of instalment 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. The hire purchase system is regulated by the Hire Purchase Act 1972. This Act defines a hire purchase as “an agreement under which 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: 1) The owner delivers possession of goods thereof to a person on condition that such person pays the agreed amount in periodic installments. 2) The property in the goods is to pass to such person on the payment of the last of such instalments, and FINANCIAL SERVICES MANAGEMENT 24
  25. 25. LEASING AND HIRE PURCHASE TYBBI 3) Such person has a right to terminate the agreement at any time before the property so passes”. Hire purchase should be distinguished from instalment sale wherein property passes to the purchaser with the payment of the first instalment. But in case of HP (ownership remains with the seller until the last instalment is paid) buyer gets ownership after paying the last instalment. HP also differs form leasing. DIFFERENCE BETWEEN LEASE FINANCING AND HIRE PURCHASE BASIS LEASE FINANCING HIRE PURCHASE Meaning 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. Hire purchase is a type of installment credit 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 anoption to purchase. Option to user No option is provided to the lessee (user) to purchase the goods. Option is provided to the hirer (user). Natures of expenditure Lease rentals paid by the lessee are entirely revenue expenditure of the lessee. Only interest element included in the HP installments is revenue expenditure by nature. Components Lease rentals comprise of 2 elements (1) finance charge and (2) capital recovery. HP installments comprise of 3 elements (1) normal trading profit (2) finance charge and (3) recovery of cost of goods/assets. NSIC AND HIRE PURCHASE Small scale firms can acquire industrial machinery, office equipment, vehicles, etc., without making full payment through hire purchase. With the help of assets acquired FINANCIAL SERVICES MANAGEMENT 25
  26. 26. LEASING AND HIRE PURCHASE TYBBI through hire purchase they can produce and sell. From the earning payments can easily be made in installments. Ultimately the ownership of assets can be acquired. Now several agencies like National Small Industries Corporation (NSIC) provide machinery and equipment to small scale units on hire purchase basis and on lease basis. NSIC follows the following Hire Purchase procedure and Hire Purchase Scheme for financing plant and machinery to small scale units. FINANCIAL SERVICES MANAGEMENT 26