leasing

1. Lease financing-definition-characteristics-types
of leasing-leasing process-services of lessor-
advantages of leasing-limitations of leasing-
Hire purchase-definition-features concepts of
hire purchasing-rights of hirer-bank finance for
hire purchase-difference between hire purchase
and lease finance-consumer finance-mechanic-
source-modes-demand for consumer finance.

2. Leasing
 Lease financing is one of the important sources of
medium- and long-term financing where the owner of an
asset gives another person, the right to use that asset
against periodical payments. The owner of the asset is
known as lessor and the user is called lessee.
 The periodical payment made by the lessee to the lessor is
known as lease rental. Under lease financing, lessee is
given the right to use the asset but the ownership lies with
the lessor and at the end of the lease contract, the asset is
returned to the lessor or an option is given to the lessee
either to purchase the asset or to renew the lease
agreement.

3. Types of Leasing
1. Financial Lease
2. Operating Lease
3.Sale and leaseback
4.Conveyance type lease
5.Leveraged and non-leveraged leases
6.Full and non pay-out lease
7. Specialized service lease
8. Net and non-net lease
9. Sales aid lease
10. Cross border lease
11. Tax oriented lease
12. Import Lease
13. International lease

4. Types of Leasing
 1. Financial Lease
 Financial leasing is a contract involving
payment over a longer period. It is a long-term
lease and the lessee will be paying much more
than the cost of the property or equipment to
the lessor in the form of lease charges. It is
irrevocable. In this type of leasing the lessee
has to bear all costs and the lessor does not
render any service

5. Types of Leasing
 2. Operating Lease
 In an operating lease, the lessee uses the asset for a
specific period. The lessor bears the risk of obsolescence
and incidental risks. There is an option to either party to
terminate the lease after giving notice. In this type of
leasing
• lessor bears all expenses
• lessor will not be able to realize the full cost of the
asset
• specialized services are provided by the lessor.
 This kind of lease is preferred where the equipment is
likely to suffer obsolescence.

6. Difference between Financial lease and operating lease

7. Types of Leasing
 3.Sale and leaseback
 In a sale and leaseback, a company owning the asset sells
it to the lessor. The lessor pays immediately for the asset
but leases the asset to the seller. Thus, the seller of the
asset becomes the lessee. The asset remains with the
seller who is a lessee but the ownership is with the lessor
who is the buyer. This arrangement is done so that the
selling company obtains finance for running the business
along with with the asset.

8. Sale and leaseback
 Sale and Leaseback is a simple financial transaction which allows
a person to lease an asset to himself after selling it. Under the
transaction, an asset previously owned by the seller is sold to
someone else and is leased back to the first owner for a long
term. The transaction thus allows a person to be able to use the
asset and not own it. One usually makes a leaseback transaction
for high value fixed assets such as real estate and goods like
airplanes and trains. Sale and leaseback is shortly called as
leaseback.
 For example, X owns a land. Under the leaseback transaction, X
will sell the land to Y and will get a lease on the same land from Y
for a long term.
 Another example is, that in case of financial distress or when a
company needs money for some purpose, instead of getting a
loan or raising money from outside, a company can sell the asset.
The buyer of the asset is someone who is only interested in a
securing a long term investment and will lease the asset back to
the company. This way the company gets the cash influx and will
still be able to use the asset.

9. Sale and leaseback
 Another example is, that in case of financial distress or
when a company needs money for some purpose, instead of
getting a loan or raising money from outside, a company
can sell the asset. The buyer of the asset is someone who is
only interested in a securing a long term investment and
will lease the asset back to the company. This way the
company gets the cash influx and will still be able to use
the asset.
 A safe deposit vault given by banks is the classic example to
quote. Here banks which initially are the owners of the
vaults, sell the vaults to a leasing company at market price
which is substantially higher than the book value.
Subsequently, the leasing company will offer back these
vaults to the same banks on long term basis. The banks will
then sub-lease these vaults to its customers.

11. Types of Leasing
 4.Conveyance type lease
 In Conveyance type lease, the lease will be for a long-
period with a clear intention of conveying the ownership
of title on the lessee.
 5.Leveraged and non-leveraged leases
 In leveraged and non-leveraged leases, the value of the
asset leased may be of a huge amount which may not be
possible for the lessor to finance. So, the lessor involves
one more financier who will have charge over the leased
asset.

13. Types of Leasing
 6.Full and non pay-out lease
 A full pay-out lease is one in which the lessor recovers
the full value of the leased asset by way of leasing. In
case of a non pay-out lease, the lessor leases out the same
asset over and over again.
 7. Specialized service lease
 The lessor or the owner of the asset is a specialist of the
asset which he is leasing out. He not only leases out but
also gives specialized personal service to the lessee.
Examples are electronic goods, automobiles, air-
conditioners, etc.

14. Types of Leasing
 8. Net and non-net lease
 In non-net lease, the lessor is in charge of maintenance
insurance and other incidental expenses. In a net lease,
the lessor is not concerned with the above maintenance
expenditure. The lessor confines only to financial service.
 9. Sales aid lease
 In case, the lessor enters into any tie up arrangement with
manufacturer for the marketing, it is called sales aid
lease.

15. Types of Leasing
 10. Cross border lease
 Lease across national frontiers are called cross
border lease, Shipping, air service, etc., will come
under this category.
 11. Tax oriented lease
 Where the lease is not a loan on security but
qualifies as a lease, it will be considered a tax
oriented lease.

16. Types of Leasing
 12. Import Lease
 In an Import lease, the company providing equipment
for lease may be located in a foreign country but the
lessor and the lessee may belong to the same country.
The equipment is more or less imported.
 13. International lease
 Here, the parties to the lease transactions may belong
to different countries which is almost similar to cross
border lease.

18. Leasing Process
 Determine Your Needs
 Review your existing lease
 Determine your size requirements
 Define your desired location
 Discuss your budget and timeline
 Provide Options
 Broker prepares a list of available properties and “out
of the box” opportunities that meet your requirements
 You and your broker discuss options and coordinate a
corresponding tour based on your selections

19. Leasing Process
 · Tour the Properties
 You and your broker visit the sites, and view selected
properties in person
 Discuss your needs and your concerns about each property
with your broker
 Narrow the properties to a “shortlist”
 · Negotiations
 Your broker prepares non-binding negotiating documents
for selected properties (see RFP and LOI examples) and
financial analysis
 Your broker negotiates for your best business terms

20. Leasing Process
 Final Property Lease
 Your attorney reviews your lease
 Follow Up
 Your broker remains involved throughout the move-in
period, monitors critical dates, and maintains a
relationship with you

21. Advantages:
 Leasing offers the following advantages:
 1. Liquidity:
 The lessee can use the asset to earn without investing money in
the asset. He can employ his funds for working capital needs.
 2.Convenience:
 Leasing is the easiest method of financing fixed assets. No
mortgage or hypothecation is required. Restrictions involved in
long-term borrowing from financial institutions are avoided.
Formalities involved in leasing are much less than in case of
borrowing from financial institutions.
 3. Hidden Liability:
 Lease obligations are not reported as a liability in the company’s
balance sheet. On the other hand, loans raised to buy assets are
reported as liability. Thus, leasing helps the lessee to report a
better debt-equity ratio.

22. Advantages:
 Leasing offers the following advantages:
4. Time Saving:
The asset is available for use immediately without loss of
time in applying for the loan, wanting for approval and
sanction, etc. Lease rentals can be matched with cash
flows of the lessee.
 5. No Risk of Obsolescence:
The risk of the asset becoming obsolete due to
technological advancements is borne by the lessor.

23. Advantages:
 Leasing offers the following advantages:
 6. Cost Saving:
 Lease rentals are deductible from taxable income. The
lessee has lower obligation in bankruptcy than under
debt financing.
 7. Flexibility:
 Leasing arrangement is more flexible. The rental
schedule can be adjusted to accommodate genuine
needs and problems of the lessee.

24. Disadvantages:
 Disadvantages:
 The lessee gets only the right to use the asset. In case the leasing
company is wound up the asset may be taken back from the lessee
thereby disrupting his operations.
 2. The lessee cannot make alterations or improvements in the asset
without the prior approval of the lessor. The lessor may also put some
restrictions on the lessee.
 3. The lessee has to pay lease rentals on a regular basis to the lessor.
Conclusion
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.

25. Conclusion
Conclusion
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.
At present, there are about 300 leasing companies in the country. Apart
from these, many companies engaged in other businesses are also leasing
out mainly to employ their investible surplus in tax-benefit. Over the
period 1980-88, gross leased assets of these companies expanded by Rs.
700 crores indicating the extent to which leasing companies have played
significant role in asset formation. This is a basic fact that requires
recognition and encouragement by the government. It is most intriguing
to note that the leasing industry is being singled out for discriminatory
practices.

26. Hire Purchase
 Meaning:
 Hire purchase is a method of financing of the fixed asset to be
purchased on future date. Under this method of financing, the
purchase price is paid in installments. Ownership of the asset is
transferred after the payment of the last installment.
 Hire purchase means a transaction where goods are purchased
and sold on the terms that:
 Payment will be made in installments,
 The possession of the goods is given to the buyer immediately,
 The property (ownership) in the goods remains with the vendor
till the last installment is paid,
 The seller can repossess the goods in case of default in payment
of any installment, and
 Each installment is treated as hire charges till the last
installment is paid.