04/10/23 nandini

A SEMINOR ON

Presented By

04/10/23 nandini

INTRODUCTION

Asset\Fund based financial servicesLease finance.Consumer credit and hire purchase finance.Factoring definition.Functions.Advantages.Evaluation and forfeiting.Bills discounting.Housing finance.Venture capital financing.Fee-based\advisory services: stock broking, credit

rating.

04/10/23 nandini

Lease financeConcept of leasing:Leasing, as a financing concept is an

arrangement between two parties, the leasing company or lessor and the user lessee, where by the former arranges to buy capital equipment for the use of the latter for an agreed period of time in return for the payment of rent.

The rentals are predetermined and payable at fixed intervals of time, according to the mutual convenience of both the parties.

However, the lesser remains the owner of the equipment over the primary period

04/10/23 nandini

A lease is defined as follows-dictionary of business and management-Lease is a form of contract transferring the

use or occupancy of land, space, structure or equipment, in consideration of payment, usually in the form of a rent.

–James c.van horne-

04/10/23 nandini

Leasing as a source of finance Leasing is an important source of

finance for the lessee. Leasing companies finance for: 1. Modernization of business.2. Balancing equipment.3. Cars, scooters and other vehicles and

durables.4. Items entitled to 100% or 50%

depreciation.5. Assets which are not being financed by

banks/institutions. 04/10/23 nandini

04/10/23 nandini

The steps involved in leasing transaction are summarized as follows:

1. First, the lessee has to decide the asset required and select the supplier he has to decide about design specifications, the price , warranties, terms of delivery, servicing etc.

2. The lessee, then enters into a lease agreement with the lessor.

3. The lease agreement contains the terms and conditions of the lease such as

(a) the basic lease period during which the lease irrecoverable.

04/10/23 nandini

(b) the timing in the amount of periodical enter payments during the lease period.

(c) details of any option to renew the lease or to purchase the asset at the end of the period.

(d) details regarding payment of cost of maintenance and repairs, taxes, insurance, and other expenses.

04/10/23 nandini

3.

After the lease agreement is signed the lessor contacts the manufacturer and requests him to supply the asset to the lessee. The lesser makes payment to the manufacturer after the asset has been delivered and accepted by the lessee.

TYPES OF LEASE DIFFERENCES BETWEEN FINANCIAL LEASE AND OPERATING LEASE

FINANCIAL LEASE:1. A financial lease is like

an installment loan. It is a legal commitment to pay for the entire cost of the equipment plus interest over a specified period of time. The lessee with commits to a series of payment which in total exceed the cost of the equipment.

2. It excludes provisions for maintenance or taxes which are paid separately by the lessee.

OPERATING LEASE:1.An operating lease is a

rental agreement. The lessee is not committed to paying more than the original cost of equipment during contractual period.

2.It provides for maintenances expenses and taxes of the lesser.

04/10/23 nandini

1. The risk of obsolescence is assumed by the lessee.

2. Contract period ranges from medium to long term.

3. Contracts are usually non cancelable.

4. Air crafts land and building heavy machinery are leased.

5. The lesser fulfills financial function

1.Leasing company assumes risk of obsolescence.

2.Contract period ranges from intermediate to short term.

3.Contracts are usually cancelable either by the lesser / by the lessee.

4.Computers, office equipments, automobiles ,etc., are leased.

5.The lesser fulfills service function.

04/10/23 nandini

Leverage leaseA leverage lease is used for financing those assets

which require huge capital outlay.The outlay for purchase cost of the asset generally

varies from Rs.50 lakhs to Rs.2 crore and has economic life of 10 years or more.The leverage lease agreement involves three parties, the lessee, the lessor and the lender.The lessor acquires the assets as per the terms of the lease agreement but finances only a part of the total investment, say 20% to 50%.

The balance is provided by a person or a group of persons in the form of loan to the lessor.

In leveraged lease, a wide range of equipments such as rail road, rolling stock, coal mining, electricity generating plants, pipe lines, ships etc. are acquired.

04/10/23 nandini

Sale and lease backUnder this type of lease, a firm which has an asset sells it to the

leasing company and gets it back on lease.The asset is generally sold at its market value.The firm receives the sale price in cash and gets the right to use

the asset during the lease period.The firm makes periodical rental payment to the lessor.The title to the asset vests with the lessor.Most of the lease back agreements are on a net-net basis which

means that the lessee pays all maintenance expenses, property taxes and insurance.

In some cases, the lease agreement allows the lease to repurchase the property at the termination of lease.

The sale and lease back agreement is beneficial to both lessor and lessee. The lessor gets immediate cash which becomes available for working capital or for further expansion and lessor gets tax benefits.

Retail stores, office buildings, multipurpose industrial building and shopping centres are financed under this method.

04/10/23 nandini

Instalment buying ,Hire purchase and leasingIn installment buying, the property passes on to

the buyer immediately as soon as the first installment is made.

The balance amount is payable in installments.Under the contract of installment the buyer has

no right to return the goods.In case of default, the seller has the right to file a

suit in the court of law to recover his dues.Hire purchase is an agreement under which the

owner delivers the goods to the buyer who agrees to make periodical payment as hire charges.

The possession of goods vests with the hirer but the ownership remains with the seller.

04/10/23 nandini

On full payment of hire charges, the buyer gets the option of purchasing the goods.

On default, the seller can reclaim the goods, subject to certain provisions of Hire Purchase Act.

Hire purchase resembles leasing in certain ways.

In both the cases the right to use the equipment is transferred to the hirer/lessee.

04/10/23 nandini

Advantages of LeasePermit Alternative Use of FoundsFaster and Cheaper CreditFlexibilityFacilitates Additional BorrowingsProtection against obsolescenceNo Restrictive CovenantsHundred Percent FinancingBoon to Small Firm

04/10/23 nandini

Disadvantages of LeasingLease is not suitable mode of project finance.This is because rentals are repayable soon after

entering into lease agreement while in new projects cash generations may start only after a long gestation period.

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.

04/10/23 nandini

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 it is a owned asset the manufacturer can sell the equipment at his will.

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.

In case of lease agreement, it is lessor who has purchased the asset from the supplier and not the lessee. Hence, the lessee by himself is not entitled to any protection in case the supplier commits breach of warranties in respect of the leased assets.

In the absence of exclusive laws dealing with the lease transaction, several problems crop up between lessor and lessee resulting in unnecessary complications and avoidable tension.

04/10/23 nandini

The lease agreement specifies the legal rights and obligation of the lessor and the lessee.

It typically contains terms relating to the folowing: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 right to enjoy the benefits of the warranties

provided by the equipment manufacturer/supplier.Insurance to be taken by the lessee on behalf of the

lessor.Variation in lease rentals if there is a change in

certain external factors like bank interest rates, depreciation rates, and fiscal incentives.

Option of equipment on expiry of the lease period.Arbitration procedure in the event of dispute.04/10/23 nandini

Structure Of Leasing IndustryThe present structure of leasing industry in India consists of (i) Private Sector Leasing and (ii) Public Sector Leasing.

The private setor leasing consists of : (i) Pure Leasing Companies, (ii) Hire Purchase and Finance Companies,and (iii) Subsidiaries of Manufacturing Group Companies.

The public sector leasing organisations are divided into: (i) Leasing divisions of financial intitutions, (ii) Subsidiaries of public sector banks, and (iii) Other public sector leasing organisations.

04/10/23 nandini

Hire Purchase

Hire purchase is a method of selling goods. In a hire purchase transaction the goods are let out on

hire by finance company (creditor) to the hire purchase customer (hirer).

The buyer is required to pay an agreed amount in periodical installments during a given period.

The ownership of the property remains with creditor and passes on to hirer on the payment of last installment.

04/10/23 nandini

FEATURES OF HIRE PURCHASE AGREEMENT:Under hire purchase system, the buyer takes

possession of goods immediately and agrees to pay the total hire purchase price in installment.

Each installment is treated as hire charges.The ownership of the goods passes from buyer to

seller on the payment of the installment.In case the buyers makes any default in payment of

any installment the seller has right to repossess the goods from the buyer and forfeit the amount already received treating it as hire charge.

The hirer has the right to terminate the agreement any time before the property passes. Then, he has the option to return the goods in which case he need not pay installments falling due thereafter. However, he can not recover the sums already paid as such sums legally represent hire charge on goods in question.

04/10/23 nandini

HIRE PURCHASE AGREEMENT There is no prescribed form for a hire purchase

agreement, but it has to be in writing and signed by both parties to the agreement.

A hire purchase agreement must contain the following particulars;

1. The description of goods in a manner sufficient to identify them.

2. The hire purchase price of the goods.3. The date of commencement of the agreement.4. The no. of installments in which hire purchase

price is to be paid, the amount, and due date.

04/10/23 nandini

HIRE PURCHASE AND LEASING Hire purchase is also different from leasing:i. Ownership.ii. Method of financing.iii. Depreciation.iv. Tax benefits.v. salvage value.vi. Deposit.vii. Rent-purchase.viii. Extent of finance.ix. Maintenance.x. Reporting.

04/10/23 nandini

BANK CREDIT FOR HIRE PURCHASE BUSINESS The subsidiary of commercial banks lend to the dealer or

to finance intermediary who has already financed articles sold by the dealer to the hirer under a hire purchase contract.

When offered this type of business, bank subsidiary would make an assessment of the standing and financial position of the dealer or of the hire-purchase company, and take into consideration the principles of good lending and carry out the procedure below:

1. Customer 2.Purpose3. Amount 4.period 5. Repayment 6.security7. Monitoring and control.

04/10/23 nandini

FACTORING DEFINITIONFactoring: A lot of working capital is tied up in the form of

trade debts. collection of debts, especially for the small –scale and medium-scale companies is the biggest problem.

The average collection period has been on the increase. Delays in collection process in turn lead to liquidity problems and consequently to delay in production and supplies.

The increase in cost of capital reduces profit and competitiveness of a company particularly the small ones in the market.

Ultimately, the small unit may become even sick. To overcome this situation, the factoring services has been conceived.

04/10/23 nandini

MEANING:

The word `factor` has been derived from Latin word `facere` which means to make or to do. In other words it is `to get things done. According to the Webster dictionary `factor is an agent, as a banking or insurance company, engaged in financing the operations of certain companies or in financing wholesale or retail trade sales, through the purchase of account receivables. Thus, factoring is method of financing where by a company sells its trade debts at a discount to a financial institution.

04/10/23 nandini

DEFINITIONRbert W. johnson in his books `financial

managements` states “factoring is a service involving the purchase by a financial organization, called a factor, of receivables owned to manufactures and distributors by their customers, with the factor assuming full credit and collection responsibilities”.

According to V.A. Avadhani, “factoring is a service of financial nature involving the conversion of credit bills into cash”.

In the words of kohok, factoring is an asset based means of financing by which the factor buys up the book debts of a company on a regular basis, paying cash down against receivables, and then collects the amount from the customers to whom the company has supplied goods.

04/10/23 nandini

FUNCTIONS As stated earlier the term `factoring` simply

refers to the process of selling trade debts of a company to a financial institution. But, in practice, it is more than that. Factoring involves the following functions:

1. Purchase and collection of debts.2. Sales ledger management.3. Credit investigation and undertaking of credit

risk.4. Provision of finance against debts, and5. Rendering consultancy services.

04/10/23 nandini

DICOUNTINGGenerally, a trade bill arises out of a genuine

credit trade transaction. The supplier of goods draws s bill on the purchaser for the invoice price of the goods sold on credit. It is drawn for short period of 3 to 6 months and in some cases for 9 months.

The buyer of goods accept the same and binds himself liable to pay the amount on the due date. In such cases, the suppliers of goods has to wait for expiry of the bills to get back the cost of the goods sold.

It involves locking up of his working capital which is very much needed for smooth running of the business or carrying on the normal production process.

04/10/23 nandini

BILLING FINANCING Bill financing is superior to the conventional and

traditional system of cash credit in many ways.First of all, it offers high liquidity, in the sense,

funds could be recycled promptly and quickly through rediscounting.

It offers quick and high yield. The bankers gets income in the form of discount charges at the time of discounting the bills.

Again, there is every opportunity to earn the spread between the rates of discount and rediscounts.

Moreover, bills drawn by business people would never be dishonored and they are not subject to any fluctuations in their values.

.

04/10/23 nandini

Cumbersome procedures to create the security and positive obligations to maintain it are comparatively very fewer

Even if the bills is dishonored, there is a simple legal remedy. The bankers has to simply note and protest the bill and debit the customer's account. Bills are always drawn with recourse and hence, all the parties on the instrument are liable till the bill is finally discharged.

04/10/23 nandini

VENTURE CAPITAL FINANCINGMEANING OF VENTURE CAPITAL:

Venture capital is long-term risk capital to finance high technology projects which involve risk but at the same time has strong potential for growth.

Venture capitalist pool their resources including managerial abilities to the assist new entrepreneur in the early years of the project.

Once the project reaches the stage of profitability, they sell their equity holdings at high premium.

DEFINITION OF VENTURE CAPITAL COMPANY :A venture capital company is defined as “a financing institution which joins an entrepreneur as a co-promoter in a project and shares the risks and rewards of the enterprise”.

04/10/23 nandini

Features of venture capital Some of the features of venture capital financing are

as under:1. Venture capital is usually in the form of an equity

participation. It may also take the form of convertible debt or long term loan.

2. Investment is made only in high risk but high growth potential projects.

3. Venture capital is made only for commercialization of new ideas.

4. Venture capitalist joins the entrepreneur as a co-promoter in projects and share the risk and rewards of the enterprise.

5. There is continuous involvement in business after making an investment by the investor.

6. Venture capital is not just injection of money but also an input needed to set-up the firm, design its marketing strategy and organise and manage it.

7. Investment is usually made in small medium scale enterprises.

04/10/23 nandini

SCOPE OF VENTURE CAPITAL Venture capital may take various forms

at different stages of the project. There are four successive stages of development:

1. Development of an idea-seed finance.2. Implementation stage-start up finance.3. Fledging stage-additional finance.4. Establishment stage-establishment

finance.

04/10/23 nandini

IMPORTANCE OF VENTURE CAPITAL:It is of great practical value to every corporate

enterprise in modern times. ADVANTAGES TO INVESTING PUBLIC:1. The investing public will be able to reduce risk

significantly against unscrupulous management, if the public invest in venture fund who in turn will invest in equity of new business.

2. Investors or have no means to vouch for the reasonableness of the claims made by promoters about profitability of the business.

3. The investors do not have any means to ensure that the affairs of the business are conducted prudently. The venture fund having representatives on the board of directors of the company would overcome it.

04/10/23 nandini

FEE-BASED\ADVISORY SERVICES: Stock broking and credit rating. STOCK BROKING:

04/10/23 nandini

CREDIT RATINGMEANING OF CREDIT RATING: To understand the meaning of credit rating,

let us look at some definitions offered by well known rating agencies.

Moodys: Ratings are designed exclusively for the purpose of grading bonds according to their investment qualities.

Australian ratings: A corporate credit rating provides lenders with a simple system of gradation by which the relative capacities of companies to make timely repayment of interest and principal on a particular type of debt can be noted.

04/10/23 nandini

FUNCTIONS OF CREDIT RATINGS The credit rating firms are supposed to

do the following functions:1. Superior information2. Low cost information3. Basis for a proper risk-return trade off4. Healthy discipline on corporate

borrowers5. Formulation of public policy guidelines

on institutional investment.04/10/23 nandini

BENEFITS OF CREDIT RATING

Low cost informationQuick investment decisionIndependent investment decisionInvestors protection

04/10/23 nandini

BENFITS TO RATED COMPANIESSources of additional certificationIncrease the investors populationforewarn risksEncourages financial disciplinemerchant bankers job made easyForeign collaborations made easyBenefits the industry as a wholeLow cost of borrowingRating as a marketing tool

04/10/23 nandini

CONCLUSION

04/10/23 nandini

04/10/2304/10/23 nandininandini

04/10/23 nandini

THANK ’Q‘ ONE & ALL