Leasing &Hire Purchase

Presented by:-Tushar Rathi

1

LEASINGIntroduction: •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

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

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

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 group in 1973.

34

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 called the ‘bailee’.”

6

Obligation For The Lesser And Lessee

• The lesser has the duty to deliver the asset to the lessee,

• The lessee has the obligation to pay the lease rentals as specified in the lease agreement

7

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

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.

•Arbitration procedure in the event of dispute.

9

10

Factors Influencing Buying Lease Decision

• Capital Adequacy• Liquidity Considerations• Flexible Considerations• Nature Of Asset• Debt Capacity• Grants And Incentive Considerations• Borrowing Restrictions

11

Types of Lease• Finance Lease• Operating Lease • Leverage Lease• Cross Border Lease

– Vendor Leasing– Wet And Dry Lease

12

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, machine tools, textile machinery, containers etc., is leased under financial lease. 13

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 seeks to recover his investment with some profit during that period.

14

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

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 both side.

16

• 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

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

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

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

• Dry Lease– Aircraft without crew, maintenance

etc– Typically used by Banks and

Leasing Companies– Leasing period is more than 24

months

21

Problems of Leasing• Unhealthy Competition• Stamp Duty• Delayed payments • Bad debts• Higher Fixed Cost per month• Reduce return to Equity Shareholder• Complex processing and

Documentation22

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.

• Faster and cheaper credit Acquisition of assets under leasing

agreement is cheaper and faster than any other source of finance.

23

• 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 BorrowingsLeasing may increase long-term ability to acquire funds..

24

• 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.

• Boom to small firm It is a boom to small firms and technocrats who are

able to make promoters contribution as required by financial institutions.

25

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 than that of debt financing.

26

• 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

Hire PurchaseIntroduction:•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 transferred only when the last installment is paid.

28

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

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

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

Features Of Hire Purchase• Possession of goods • Each installment is treated as hire

charges.• Ownership• Default in the payment • Terminate the agreement

32

Advantages Of Hire Purchase

•Spread the cost of finance

• Interest-free credit

•Higher acceptance rates

•Sales

•Debt solutions33

Disadvantages Of Hire Purchase

• Personal debt• Final payment• Bad credit• Creditor harassment• Repossession rights

34

COMPARISIONS COMPARISIONS BETWEEN LEASING & BETWEEN LEASING &

HIRE PUECHASEHIRE PUECHASE

35

OWNERSHIPLEASING

• 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

DEPRECIATIONLEASING

• 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

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

RENT-PURCHASELEASING

• In Leasing, the Lessee take the asset on a rent basis.

• Lease financing is invariably 100% financing. It does not required any immediate down payment or margin money by the Lessee.

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

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

THANK YOU

41