LEASING A MODERN FINANCING ALTERNATIVE

Lecture No. 7TOB

CONTENTSCONTENTS

Leasing – conceptual approachesLeasing – conceptual approaches

The leasing market in RomaniaThe leasing market in Romania

Leasing versus banking creditLeasing versus banking credit

Leasing definedLeasing defined

Method of payment for the use of an assetMethod of payment for the use of an asset Different from rentingDifferent from renting A party undertakes to transfer for a A party undertakes to transfer for a

determined period of time to another party determined period of time to another party the right to use an asset against a regular the right to use an asset against a regular paymentpayment

The right of optionThe right of option

Leasing – conceptual approachesLeasing – conceptual approaches

DefinitionDefinition::

Parties: lessor/the financer (locator/finantator/Leasing-Geber) lessee/the user (locatar/utilizator/Leasing-Nehmer) supplier (furnizor/Hersteller) insurance company (companie de asigurari)

Mechanism of leasingMechanism of leasing 1. A leasing contract is signed between the Lessor and the Lessee2. The Lessor pays the purchase price to the Supplier3. The equipment is delivered to the Lessee4. The Lessee pays lease rentals determined by contract to the Lessor.

Types of lease operationsTypes of lease operations

short term leasingshort term leasing medium termmedium term long term long term

direct direct indirectindirect

lease-back (sale and lease-back)lease-back (sale and lease-back)buy-backbuy-back

personnel leasingpersonnel leasingexperimentalexperimentaltime-sharingtime-sharing

international (external) leasing international (external) leasing internal leasinginternal leasing

LEASING termsLEASING termsEconomic life Economic life ::

the period along which a certain good is estimated to be economically usable by one the period along which a certain good is estimated to be economically usable by one or more users; oror more users; or

the number of the production units or similar units that are estimated to be obtained the number of the production units or similar units that are estimated to be obtained through using the good by one or more users.through using the good by one or more users.

leasing rate / royaltyleasing rate / royalty : : in case of in case of financial leasingfinancial leasing: the due quota of the entry value of the good and of the : the due quota of the entry value of the good and of the

leasing interest (the average rate of the bank interest on the Romanian market);leasing interest (the average rate of the bank interest on the Romanian market); in case of in case of operational leasingoperational leasing – the quota for amortization calculated according to – the quota for amortization calculated according to

the normative acts in force and a benefit established by the contracting partiesthe normative acts in force and a benefit established by the contracting parties

entry value entry value ((valoare de intrare)valoare de intrare) -is the value at which the good was acquired by the financing party, the cost of -is the value at which the good was acquired by the financing party, the cost of

acquisition respectively.acquisition respectively.

residual value residual value ((valoare rezidualăvaloare reziduală)) the value at which, at the expiry date of the leasing contract, the transfer of the right of the value at which, at the expiry date of the leasing contract, the transfer of the right of

property over a good by the user is done.property over a good by the user is done.

total valuetotal value ( (valoare totalăvaloare totală) ) - the total value of the leasing rates to which the residual value is added.- the total value of the leasing rates to which the residual value is added.

Advantages of leasingAdvantages of leasing

financial statements arefinancial statements are not "loaded" with expenses not "loaded" with expenses (just the monthly royalty)(just the monthly royalty)

- credibility - credibility - future financing contracts- future financing contracts

ease of scheduling the expensesease of scheduling the expenses eeasasy replacementy replacement of depreciated goods of depreciated goods no need for supplementary guaranteeno need for supplementary guarantee rapidity of the approval of the operation processrapidity of the approval of the operation process

DisadvantagesDisadvantagesFor the lesseeFor the lessee

Equipment is not operational under the whole Equipment is not operational under the whole period of the contractperiod of the contract

The cost of the leasingThe cost of the leasing The ownership of the goodThe ownership of the good

For the lessorFor the lessor goods can be damaged after the first leasegoods can be damaged after the first lease royality delayedroyality delayed

Comparing leasing and creditComparing leasing and creditLeasingLeasing CreditCredit

Ensures the investment’s financingEnsures the investment’s financing Ensures the investment’s financingEnsures the investment’s financing

No other collateral requested No other collateral requested Supplementary collateralSupplementary collateral

Financial statements do not include Financial statements do not include liabilities to banksliabilities to banks

Financial statements include liabilities Financial statements include liabilities to banksto banks

Duty fees are paid at the residual Duty fees are paid at the residual valuevalue

Duty fees are paid at the entire value Duty fees are paid at the entire value of the goodof the good

Advance requiredAdvance required Advance paymentAdvance payment

Leasing market in Romania - short Leasing market in Romania - short historyhistory 1994 – the first Romanian leasing company1994 – the first Romanian leasing company 1996 – ASLR (Association of leasing companies in Romania)1996 – ASLR (Association of leasing companies in Romania) two conditions imposed by law two conditions imposed by law

-object of the activity leasing-object of the activity leasing-registered and paid capital of EUR 500,000-registered and paid capital of EUR 500,000

- 331 companies, 213 sent documents to the BNR to be registered as 331 companies, 213 sent documents to the BNR to be registered as IFN (after new regulations Norm 28/2006)IFN (after new regulations Norm 28/2006)

- 100 active , 33 members of ASRL (48% of the market) – 38 in 2005100 active , 33 members of ASRL (48% of the market) – 38 in 2005

News of Legal Framework OUG 50/2010 ref. protectia consumatorului/ Gov.Ord. no.50/2010 regarding the CC agreements:

Aplicarea retroactiva / retroactive application: Extra-costuri ale finantatorilor si ale clientilor / Extra-costs for credit institutions and

consumers Nerespectarea Constitutiei/textului Directivei si a principiilor dreptului comercial/ No

respect for Constitution, EU Directive and commercial principles Incurajarea abuzurilor si a unui comportament nesanatos de plata/ Encouraging abuse and

an unhealthy payment behavior Confera puteri abuzive unei agentii guvernamentale in aria de decizie legala a BNR/ Gives

abusive power to a Governmental agency on Central Bank’s legal framework Codul Fiscal/ Fiscal Code

Cresterea costurilor de finantare a achizitiei prin aplicarea TVA marit / Higher financing costs due to an increased VAT

Scaderea capacitatii de plata prin cresterea TVA/ Lower payment capacity due to an increased taxation

News of Legal Framework

Constitutional Court Decision no. 458/2009 regarding the consent for the forced execution Increased number of contracts waiting for consent of

forced execution (9000 files) Higher provision costs Increased operational costs for the lenders Encouraging fraud and an unhealthy payment

behavior

Leasing versus bank creditLeasing versus bank credit

comparison between the acquisition of a good comparison between the acquisition of a good through leasing and through bank creditthrough leasing and through bank credit

object: Dacia Logan Laureate object: Dacia Logan Laureate price: 6,785.73 Euro (without VAT) price: 6,785.73 Euro (without VAT)

institutions: institutions: BCR BCR (Banca Comercială Română) and (Banca Comercială Română) and BCR LeasingBCR Leasing

Comparison tables: leasing versus creditComparison tables: leasing versus creditPeriod of the leasing contract – Period of the leasing contract – monthsmonths

48 48

Currency Currency EuroEuro

Price (no VAT)Price (no VAT) 6,785.736,785.73

Advance (15-50% of the price Advance (15-50% of the price no VAT ) -20%no VAT ) -20%

1,357.151,357.15

Financed valueFinanced value 5,428.585,428.58

Interest rateInterest rate 10.50 %10.50 %

Residual value Residual value 139.02139.02

Leasing installment (no VAT)Leasing installment (no VAT) 138.99138.99

Management commissionManagement commission 135.71135.71

Value of the contractValue of the contract 8,164.418,164.41

Total costTotal cost 9,479.499,479.49

Period of the credit contract – Period of the credit contract – monthsmonths

4848

Currency Currency EuroEuro

Price (no VAT)Price (no VAT) 6,785.736,785.73

Advance- 25% of the total value Advance- 25% of the total value of the carof the car

2,0412,041

Bank loan (75%* total value)Bank loan (75%* total value) 6,1236,123

Interest rateInterest rate 12%12%

Residual value Residual value --

Credit installmentCredit installment 161161

Management commissionManagement commission 169.62169.62

Value of the contractValue of the contract7 6687 668

Total costTotal cost9,878.629,878.62

Thank you for Thank you for your attention!your attention!