Lease Financing Ppt for FS

8/2/2019 Lease Financing Ppt for FS

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Kuldeep ojha

Dinesh salameChandrabhan

akash sharma

FINA 500 MONEY, BANKING AND FINANCIAL MARKET.


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What is LEASE?A lease is a contract whereby the owner of an asset

grant to another party the exclusive right to use theasset usually for an agreed period of time in return forthe payment of rent.

Parties to a Lease

Lessee--User of the Asset

Lessor--Owner of the Asset Trustee--Represents the Creditors with a Third Party

Lease


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ABOUT LEASE FINANCE. A lease is an agreement allowing one party to use anothers

property, plant, or equipment for a stated period of time inexchange for consideration. Leases have become more

prevalent as businesses and consumers look for alternativesto finance the acquisition of fixed assets. A lease agreementinvolves at least two parties ) a lessor (such as a bank), whoowns the property, and a lessee, who uses the property. The

lessor, essentially a creditor in the transaction, is repaid from a combination of

lease or rental payments, tax benefits, and proceeds fromthe sale or re-lease of the property at the end of the lease

term.


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MAP of FINANCE SOURCES


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CHARCTRISTICS....

In lease transaction the lessee does not get the ownership of asset butgets as right only to use the asset.

The amount regularly paid for the use of such asset is called leaserental. As it is treated as rent it is revenue expenses.

Such transaction can we made for both immovable and movableproperties.

Sometimes the agreement provides that the lessee will have a right tobuy the asset when lease contract will be over , at the time of makingthe contract or at the end of contract.

If there is not right to buy in the lease contract, the lease will have to

return the to the lesser . when period of lease contract is over. When the contract for lease is made the ownership of asset does not

pass to the lesser when the lease contract is over.

When prices of asset are constantly rising due to inflation the leasearrangement keeps the lessee free from effect of price rise. His rent

remain the same when price rise or fall.


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1. Operating lease

2. Finance lease

3. Capital lease

4. Direct finance lease

5. Full payout lease

6. Guideline lease

7. Leveraged lease

8. Net lease

9. Open-end lease10. Sales-type lease

11. Synthetic lease

12. Tax lease

13. True lease

Common Lease Types of


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1.Operating Lease: An operating lease is particularly attractive tocompaniesthat continually update or replace equipment and want to useequipment without ownership, but also want to return equipment at lease-end and avoid technological obsolescence.

2.Finance Lease: A finance lease is a full-payout, non cancellable

agreement, in which the lessee is responsible for maintenance, taxes andinsurance.

3. Capital Lease: Type of lease classified and accounted for by a lessee as apurchase and by the lessor as a sale or financing, if it meets any one ofthe following criteria: (a) the lessor transfers ownership to the lessee atthe end of the lease term; (b) the lease contains an option to purchase theasset at a bargain price; (c) the lease term is equal to 75 percent or moreof the estimated economic life of the property (exceptions for usedproperty leased toward the end of its useful life); or (d) the present valueof minimum lease rental payments is equal to 90 percent or more of thefair market value of the leased asset less related investment tax creditsretained by the lessor.

LEASE TYPES..


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LEASE TYPES..4.Direct Financing Lease : A non-leveraged lease by a lessor (not a

manufacturer or dealer) in which the lease meets any of the definitional

criteria of a capital lease, plus certain additional criteria.

5. Full Payout Lease:A lease in which the lessor recovers, through thelease payments, all costs incurred in the lease plus an acceptable rate ofreturn, without any reliance upon the leased equipment's futureresidual value

6. Guideline Lease:A lease written under criteria established by the IRS

to determine the availability of tax benefits to the lessor.

7.Leveraged Lease:In this type of lease, the lessor provides an equityportion (usually 20 to 40 percent) of the equipment cost and lendersprovide the balance on a nonrecourse debt basis. The lessor receives

the tax benefits of ownership.


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LEASE TYPES

8.Net Lease:A lease wherein payments to the lessor do not include insuranceand maintenance, which are paid separately by the lessee.

9.Open-end Lease :A conditional sale lease in which the lessee guarantees

that the lessor will realize a minimum value from the sale of the asset at the

end of the lease.

10.Sales-type Lease:A lease by a lessor who is the manufacturer or dealer, inwhich the lease meets the definitional criteria of a capital lease or direct

financing lease.

11.Tax Lease:A lease wherein the lessor recognizes the tax incentives

provided by the tax laws for investment and ownership of equipment.

Generally, the lease rate factor on tax leases is reduced to reflect the lessor'srecognition of this tax incentive

12.True Lease:A type of transaction that qualifies as a lease under the Internal

Revenue Code. It allows the lessor to claim ownership and the lessee to

claim rental payments as tax deductions.


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Advantage:

Provides full finance : provision of 100% finance is main

benefit of leasing . if the lease borrows money from banks to

purchase the asset he gets 70 to 80% finance only. While in

case of lease he does not have to make any provision for

finance. He gets 100% finance. He will be required to pay rent

only.

Flexible : it is flexible In the sense that risk of obsolesecne

because he is not of financial lease, agreement is for the whole

useful life of asset. The lessee is required to make the rental

payment for the whole period even if the asset become

obsolete.


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Advantage:

Save from recurring cost of finance : In case asset are taken on lease, the

firm will not have to incur the cost of raising finance frequently whenever it

wants to purchase any asset.

Absence of restriction : - it is main advantage of leasing. If money is

borrowed from banks or other financial institution , they would putrestriction on borrower as regard further amt. to be borrowed dividend etc..

but in case of lease it is absolutely free from all such restriction.

Tax benefit : - both the parties get certain deduction. The lessee gets full

rent as deduction. This is higher then depreciation charges because it

includes interest and some amt. toward profit of the lesser Increase the capacity to borrows : - the lesser does not show the asset in

his balance sheet nor the future liability for payment of rentals. Hence less

debts equity ratio remains law and he will be able to borrow more funds in

future.


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Advantage:

Useful is case if fast changing technology : - it is particularly useful to thelessee in case were fast technology change are taking i.e reason why more

and more business resort to leasing in case of very costly and expensive

machines.

Faster and cheaper credit : - its is faster than if money is to be borrowed

from banks or other financial institution. Leasing company promptly

sanction the request and it is more accommodative in respect of terms of

financing.

Disadvantages:No benefit of residential value :- when a firm purchase an asset, it is hasfull right to value of asset at the end of its useful life. But the benefit is not

available to the lessee in case of lease .

No benefit of ownership : - the lessee does not get any benefit, which

would be available if he were the owner of asset e.g price of an asset has

increased considerably, the lessee cant sell it.


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Disadvantages:

High cost of leasing : - It is experience that leasing is more costly than

borrowing. The rate of interest charged very much higher than that on

borrowing. This is because the lease rental includes the cost of asset, some

profit to the lesser payment for the employing experts by the lesser and also

payment for related service. Of course if the lesser is making purchase ofasset in large scale hr gets the benefit of the lower cost and this can be form

of lower rent.

Not flexible : - In case the lessee is not able to arrange for finance for

buying an asset he will have to lease the asset. In that case, the amt. of leaserent is fixed in advance for the whole period. If the rate of interest declines

in market the borrowing can be returned and interest can be saving. But that

is not possible in a change, because rent amt. is not changed.


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Why the Lease Financing is important in this era?

Leasing is big business in the 21st century with over billions of

dollars worth of commercial equipment financing being done

by American business annually. Whether it is commercial

equipment leasing or a sale lease back, both are increasingly

being used to acquire liquid funds for a company. Financing through lease financing company can help your

business conserve working capital. And, because commercial

equipment financing frees up your working capital for other

investments or profit making activities it just makes sense to beleasing rather than buying.

Documents

Lease Financing Ppt for FS