financial management term loans and lease financing
DESCRIPTION
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TERM LOAN&
LEASE FINANCING
Meaning• A term loan is a monetary loan that is repaid in regular payments over a set period of time. Term loans usually last between one and ten years, but may last as long as 30 years in some cases. A term loan usually involves an unfixed interest rate that will add additional balance to be repaid.
Usage• Term loans can be given on an
individual basis but are often used for small business loans. The ability to repay over a long period of time is attractive for new or expanding enterprises, as the assumption is that they will increase their profit over time. Term loans are a good way of quickly increasing capital in order to raise a business’ supply capabilities or range. For instance, some new companies may use a term loan to buy company vehicles or rent more space for their operations.
Considerations One thing to consider when
getting a term loan is whether the interest rate is fixed or floating. A fixed interest rate means that the percentage of interest will never increase, regardless of the financial market. Floating interest rates will fluctuate with the market, which can be good or bad for you depending on what happens with the global and national economy.
Student loans
• Some student loans are essentially term loans. In the United States, the Stafford Loan is often offered to college students as a means of paying tution and living expenses. This loan is unique in several ways, and can be very beneficial to students. Students are also typically given a six month grace period following graduation before beginning repayments.
LEASE
FINANCING
Meaning Of Lease
• “Lease is a contract whereby the owner of an asset (lessor) grants to another party (lessee) the exclusive right to use the asset usually for an agreed period of time in return for the payment of the rent.”
•Owner of the AssetLessor
•User of the AssetLessee
PARTIES TO THE LEASE
Why own a cow
when milk is so cheap?
All you really need is
milk
and not the cow
The person who wants to manufacture the product needs an equipment to do it but not the ownership of an equipment. The concept of lease financing says ‘ Eat the mangoes rather than counting the trees.’
Lease financing denotes procurement(buying) of assets through lease.
The subject of leasing falls in the category of finance.
Leasing has grown as a big industry in USA and UK and spread to other countries in the present century.
In India, the concept was started in 1973.
It is a commercial arrangement whereby the equipment owner conveys to the equipment user the right to use the equipment in return for a rental.
CONCEPT
Types of leasing
Financial and operating lease
Sale and lease back
Single investor and leveraged
lease
Domestic and international
lease
Financial lease
• The lessor transfers to the lessee substantially all the risks and rewards incidental to the ownership of the asset.
• It is a long term non-cancellable lease.• Types of assets included under such lease are lands, building, heavy machinery etc.
Operating lease
• It is one which is not a financial lease. • It is a short term cancellable lease.• The lessor provides services attached to the leased asset such as maintenance, repair and technical advice.
• It is also known as service lease. Operating lease is primarily used for computers, office equipments, trucks etc.
in this, the lessee is already the owner of the asset. He, under the lease agreement, sells the asset to the buyer.
The buyer leases back the same asset to the owner (now the lessee) in consideration of lease rentals. under the sale and lease back, the lessee not only retains the use of the assets but also gets funds from the sale of the assets to the lessor.
SALE AND LEASE BACK
Single investor lease
• There are only two parties to the lease transaction, the lessor and the lessee.
• Arrangement for assets of huge capital outlay. • It is a 3 sided arrangement.• Lesser borrows a part of purchase cost of the asset from the third party i.e. lender.
LEVERAGED LEASE FINANCING
Domestic lease
• A lease transaction is classified as domestic if all the parties to the agreement are domiciled(resided) in the same country.
International leaseIf the parties to the lease transaction are domiciled in the different countries, it is known as international lease.
International lease
Import lease Export lease
• Import lease: the lessor and the lessee are domiciled in the same country but the equipment supplier is located in a different country.
Cross-border lease(export lease): when the lessor and the lessee are domiciled in different countries, the lease is classified as cross border lease. The domicile of supplier is immaterial.
SELLER BUYER
LESSORLESSEE