Lease financing

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1. LEASE FINANCING

2. HISTORY MEANING TYPES ADVANTAGES & DISADVANTAGES FINANCE INSTITUTION WHICH LEASE FINANCE CONCLUSION CONTENTS

3. Leasing was introduced in the United States of America during 1940s and 1950s. It is estimated that Leasing industry in the USA finances about 25 per cent of capital goods acquisition. The concept of leasing was pioneered in India by the SPIC group which established “First Leasing Company of India Limited” in 1973 at Chennai . Later on 20th Century Leasing Company Limited was set up in Mumbai. Now, IFCI, IDBI, ICICI, State Bank of India, SIDCs, Sundaram Finance and other entities are running leasing companies in our country. HISTORY

4. A lease is a legal agreement amongst two parties known as lessor ( owner of the asset) and a lessee (user of the asset). Lessor grants a temporary possession to the lessee to use his/her property or asset such as land and building against some monetary compensation for a certain period as mentioned in an agreement of lease. LEASE

5. PARTIES INVOLVED Lessor :  Lessor is the holder or the owner of the property or land to be leased. It can be an individual or any legal entity. Lessee :  The person who is taking the property or land in a lease by paying money for a certain period is termed as lessee. Any person or entity who is in need of property or land can be a lessee.

6. TYPES OF LEASE FINACE LEASE OPERATING LEASE SALE AND LEASE BACK LEVERAGE LEASE DIRECT LEASE SINGLE INVESTOR LEASE DOMESTIC LEASE INTERNATIONAL LEASE

7. It is long term arrangement which is non-cancellable during primary lease period which is generally full economic life of leased asset. TWO PERIOD PRIMARY PERIOD: It is non-cancellable period and in this period lessor recover his total investment through lease rental. SECONDARY PERIOD: It is smaller than that of primary period. This is often known as peppercorn rental. FINANCIAL LEASE

8. All risk & reward of asset transfer to lessee for lease rental except transfer of ownership of asset. Lessee is responsible for repair & maintenance of asset. Lessor’s investment is assured because of its long term duration. FINANCIAL LEASE CONTD

9. Lease term is much lower than the economic life of the asset and thus the total investment of the lessor is not recovered through lease rental during primary period of lease. Lessor have to depend on leasing of an asset to different lessee for recovery of his/her investment. Lessor provides the technical knowledge of leased asset to the lessee. 2. OPERATING LEASE

10. Risk & reward incidental to the ownership of asset are borne by the lessor. Besides the cost of machinery the lessor bears insurance , maintenance and repair cost etc. This is also known as SERVICE LEASE. The lessee/lessor has right to terminate lease after due notice. For example- office computer, equipment etc. OPERATING LEASE CONTD

11. Under this type of lease the owner of the asset sells the asset to the lessor and takes it back on lease under the lease agreement i.e. the lessee is the owner of the asset. This type of lease helps in transferring the ownership from true owner to the lessor. This exchange of the title helps (previous owner) the lessee in liquidating the funds tied up in a particular asset. 3. SALES AND LEASEBACK

12. Hence, the seller of the asset becomes the lessee and the buyer of the asset becomes the lessor. The seller (lessee) receive the cost of asset and the right to use the asset , while the buyer enjoys the ownership of asset and lease rental for the agreed period. For example:  A is the owner of the building; he sold the building to B and got that same building in lease from A for the long term. SALES AND LEASEBACK CONTD

13. In such a lease agreement , the lessor buys an asset through borrowed funds. Since huge capital is involved in purchase of heavy machines and equipment, therefore, borrowed funds are used to finance an asset. Generally three parties involved- a lessee(user), a lessor (leasing company) and a financer (Banks and Financial institution). 4.LEVERAGE LEASE

14. The lessor (leasing company) provides 20%-40% of the purchase value of the asset through equity capital and the remaining amount is borrowed from commercial bank or financial institutions (financer). Hence it is financed partly by debt and partly by equity. LEVERAGE LEASE CONTD

15. When the lease belongs to the owner of the assets and users of the assets with direct relationship it is called as direct lease. Direct lease may be Dipartite lease (two parties in the lease) or Tripartite lease. (Three parties in the lease) DIRECT LEASE

16. When the lease belongs to only two parties namely leaser and it is called as single investor lease. It consists of only one investor (owner). Normally all types of leasing such as operating, financially, sale and lease back and direct lease are coming under this categories. SINGLE INVESTOR LEASE

17. In the lease transaction, if both the parties belong to the domicile of the same country it is called as domestic leasing. DOMESTIC INVESTOR LEASE

18. If the lease transaction and the leasing parties belong to the domicile of different countries, it is called as international leasing. Advantages of Leasing Leasing finance is one of the modern sources of finance, which plays a major role in the part of the asset based financing of the company. It has the following important advantages. INTERNATIONAL INVESTOR LEASE

19. DIFFERENCE BETWEEN OPERATING AND FINANCE LEASE BASIS FINANCIAL LEASE OPERATING LEASE MEANING A commercial contract in which the lessor lets the lessee to use an asset in exchange of periodical payments for usually long period. A commercial contract where the lessor allows the lessee to use an asset in exchange of periodical payments for small period of time. CONCEPT Long term concept. Short term concept NATURE OF CONTRACT It is called loan agreement/contract. It is called rental agreement/contract. MAINTENANCE In this lessee would need to take care and maintain the asset. In this, lessor would need to take care and maintain the asset.

20. BASIS FINANCIAL LEASE OPERATING LEASE OBSOLESCENCE It lies on part of lessee. It lies on part of lessor. CANCELLATION It is generally non-cancellable. It can be terminate by the consent of both parties. TAX ADVANTAGE The expenses for the asset such as depreciation , financing are allowed for tax deduction to lessee Even the lease rent is allowed to be deducted from the tax.

21. ADVANTAGES OF LEASE

22. Rate of interest is fixed:   The rate of interest throughout the lease period remains the same as decided during the time of signing the agreement with the mutual consent of the lessor and the lessee. Thus, the lessee need not worry about the rise in the rate of interest .  Low initial investment:   For the new set-ups leasing is an excellent option with low initial cost and expenditure on the purchase of assets. ADVANTAGES CONTD

23. Tax benefits:   Both lessor and lessee get benefited by the leasing facility. The lessor can claim depreciation in books; on the other hand, lease rentals can be claimed as an expense by the lessee. Effective use of the company’s capital:   Company can use their capital fund for increasing their other investments rather than investing in asset purchasing. Leasing becomes a better option than purchasing fixed assets; the company need not spend bulk amount together. ADVANTAGES CONTD

24. Convenience:   Buying assets for the business will create an unnecessary burden and increase the company’s cost. Thus, leasing becomes the most convenient way of acquiring required fixed assets for the business without investing money in bulk . Time saver:   The lessee can get immediate possession of the asset after signing the lease contract and do not have to wait for the bank’s or financial institution’s approval for the loan to buy an asset. ADVANTAGES CONTD

25. No asset obsolescence burden:   The lessee does not have to take a burden of the charge of asset obsolesces because of any technological advancements or changes as it is the liability of the lessor to change the obsolete assets, the lessee’s only liability here is to pay a rent for using such asset. ADVANTAGES CONTD

26. DISADVANTAGES OF LEASE

27. No ownership:   Lessee doesn’t have the holding rights or ownership over the asset after the expiry of the lease agreement, i.e., the lessor has a right to lease its asset to another company or sell an asset after the lease period .  Maintenance of the assets:   In case of the financial lease, the lessee enjoys the right of ownership on the asset till the date of the expiry of the lease agreement. Along with that, the lessee has to bear the burden of maintaining and repairing such assets till it is in their possession. DISADVANTAGES CONTD

28. Lease expenses:   The company has to make regular lease payments to the lessor for using their asset irrespective of the profits or losses earned, such expense is treated as a lease expense in the books of the lessee .  Penalty on lease termination :  If in case lessee failed to complete lease term or violates any clause mentioned in the contract due to any reason he has to face heavy penalties for breach of contract. DISADVANTAGES CONTD

29. Higher cost:   L easing an asset does not put a one-time burden on the lessee. It may cost higher in the long-run as the lessor may charge a high amount as rent for recovering the asset’s cost plus his profit . Restrictions on use of equipment :  Lessor may impose some conditions regarding the use of assets at the time of lease and lessee is liable to follow those restrictions while using such assets. DISADVANTAGES CONTD

30. No benefits of value appreciation:   No matter the value of the asset increases during the period of the lease, the lessor won’t get any benefit from the price rise of the asset, the lessee will only pay the rental amount as mentioned in the lease agreement .  Double Taxation:   Sales tax may be imposed twice once at a time of purchase of assets and twice at a time of leasing of an asset. DISADVANTAGES CONTD

31. Lease financing is the best option for those who cannot raise the fund with debt financing. Companies having excess assets can lease their assets to the companies those who require such assets. Thus leasing becomes constructive for both the parties the lessor and the lessee. CONCLUSION