Leasing is suited for power user who need to keep up with technology

1. Leasing &
Hire PurcHase
Presented by:-
Tushar Rathi
1

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. 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. 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. 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. 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. 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. 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. 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

11. Factors Influencing Buying
Lease Decision
• Capital Adequacy
• Liquidity Considerations
• Flexible Considerations
• Nature Of Asset
• Debt Capacity
• Grants And Incentive Considerations
• Borrowing Restrictions
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12. Types of Lease
• Finance Lease
• Operating Lease
• Leverage Lease
• Cross Border Lease
– Vendor Leasing
– Wet And Dry Lease
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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. 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. 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.
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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
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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
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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%
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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
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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
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21. • Dry Lease
– Aircraft without crew, maintenance etc
– Typically used by Banks and Leasing
Companies
– Leasing period is more than 24 months
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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
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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. • 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..
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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
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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
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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. 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. 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.
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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.
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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. Features Of Hire Purchase
• Possession of goods
• Each installment is treated as hire
charges.
• Ownership
• Default in the payment
• Terminate the agreement
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33. Advantages Of Hire Purchase
• Spread the cost of finance
• Interest-free credit
• Higher acceptance rates
• Sales
• Debt solutions
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34. Disadvantages Of Hire Purchase
• Personal debt
• Final payment
• Bad credit
• Creditor harassment
• Repossession rights
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35. COMPARISIONSCOMPARISIONS
BETWEEN LEASING &BETWEEN LEASING &
HIRE PUECHASEHIRE PUECHASE
35

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. 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.
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TAX BENEFITS

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.
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DEPOSIT

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. 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.
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REPORTING

41. THANK YOU
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