Lease Financing and Factoring

8/2/2019 Lease Financing and Factoring

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LEASE FINANCING AND

FACTORING

Presented by,

Group 1


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LEASE FINANCING

A lease is a contract wherebythe owner of an asset grant to another party

the exclusive right to use the asset usually foran agreed period of time in return for thepayment of rent.

First in USA (1940).


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PARTIES TO A LEASE LESSEE -- User of the

Asset( business enterprise)

LESSOR-- Owner of theAsset(finance company)

TRUSTEE -- Represents the Creditors

with the 3rd party lease.


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LEASE FINANCING IS A COMMERCIAL

AGREEMENT WHERE;

the lessee will select an asset

the lessor will purchase that asset;

the lessee will have use of that assetduring the lease;

the lessee will pay a series ofinstallments for the use of thatasset;

the lessor will recover a large part orall of the cost of the asset lus earn


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TYPES OF LEASE

Financial lease

Maintenance/ gross lease

Operating lease

IBM

Sales and lease back lease

Leverage lease


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ADVANTAGES

1. It offers fixed rate financing.

2. Leasing is inflation friendly.

3. The lease is not connected to thesuccess of the business.

4. You do not need to make largecash payments for the purchase of

needed equipment.

5. Equipment can be better utilized.

6. There is typically an option to buy

equipment at end of lease term.


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7. You can keep upgrading theequipments.

8. It is easier to obtain lease

financing than loans fromcommercial lenders.

9. It offers potential tax benefitsdepending on how the lease isstructured.

10. It is a convenient alternative forsmall firms.


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DISADVANTAGES

1. You have an obligation to continue makingpayments.

2. You have no equity until you decide topurchase the equipment at the end of the leaseterm, at which point the equipment hasdepreciated significantly.

3. Although you are not the owner, you are stillresponsible for maintaining the equipment asspecified by the terms of the lease.


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FACTORING


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FACTORING

The word factor has been derivedfrom the Latin word

facere which means to make or to

do . In other words ,it means to getthings done .Factor is an agent as abanking or insurance companyengaged in financing the operations

of certain companies .In other wordsfactoring is a continuousarrangement between a financial

institution and a company which


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Definition of factoring

According to V.A. Avadhani

Factoring is a service of financialnature involving the conversion ofcredit bills into cash.


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Modus operandi of factoring

1. Their should be a factoring arrangement between theclient and the factor which is the financial organization

2. Whenever the client sells goods to trade customers oncredit, he prepare invoices in the usual way.

3. The goods are sent to the buyers without raising a bill ofexchange but accompanied by an invoice.

4. The debt due by the purchaser to the client is assigned tothe factor by advising the trade customers to pay the

amount due to the client to the factor.5. The client hands over the invoices of the factor cover of a

schedule of a along with the copies of invoices andreceipted challans on copies of R/R and L/R.

6. The factor make an immediate payment up to 80% ofthe assigned invoices and the balances 20% will be paid


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Terms and conditions

1. Assignment of debt in favor of thefactor

2.

Selling limits for the client.3. Condition within which the factor

will recourse to the client in case ofnon payment by trade customer

4. Details the payment to the factorfor his services, say for instance asa percentage on turn over.


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Functions

1. Purchase and collection of debts.

2. Sales ledger management.

3. Credit investigation andunderstanding of credit risk.

4. Provision of finance against debts

and5. Rendering and consultancy service.


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Benefits of factoring

1. Financial service

2. Collective service

3. Credit risk service4. Provision of Expertise sales ledger

management

5. Economy in servicing

6. Off Balance Sheet Financing

7. Consultancy service


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Types of Factoring

1. Full service factoring

2. With recourse Factoring

3. Maturity factoring

4. Bulk factoring

5. Invoice factoring6. Agency factoring

7. International factoring


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1. Factoring Fees

2. Discount charges


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Factoring fees

This is charged mainly asadministrative expenses forproviding various services to the

client immediately.

1. Sales ledger administration

2. Credit control administration

3. Bad debts administration

. Generally the charges varies

between 1% and 2.5% of the


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Discount charge

For providing instant credit to theclient by way of prepayment, somecharges have to levied and they are

collected discount charges . Thischarge is normally linked with thebase rate


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THANK YOU.

Documents

Lease Financing and Factoring