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leasing

Hire purchase
Buyer takes possession and agrees to pay in installments. Each installment is hire charges. Ownership passes on the payment of installment. In case of default , seller can repossess. Hirer can terminate the agreement & then he need not pay installment

Hire purchase and leasing


POINT OF DIFFERENCE OWNERSHIP METHOD OF FINANCING DEPRECIATION TAX BENEFIT HIRE PURCHASE Hire vendor For both consumer assets &business asset Cant be claimed by lessee Only the interest component is tax deductible. Hirer enjoys salvage value as he is the owner. buy 75 80% financing 20% LEASING With the lessor Business asset Can be claimed by hirer Lease rental is tax deductible expense Lessee can enjoy the salvage value rent 100% financing Not required

SALVAGE VALUE RENT-PURCHASE EXTENT OF FINANCE DEPOSIT

Principles for good lending


Customer Type of goods being bought- is it saleable. Period normally 3 years. Repayment- can be tailor made to suit the hirer. Security Periodical review

Leasing
lease is a contract whereby the owner of an asset grants to another party the right to use the asset usually for an agreed period of time in return for the payment of rent-James Horne. STEPS INVOLVED IN LEASING
Lessee has to decide the asset and supplier,price,servicing etc. Lessee & lessor enter into agreement with terms & condition.(lease period, timing & amount, repairs etc.)

TYPES OF LEASE
FINANCIAL LEASE
IRREVOCABLE AGREEMENT LESSEE USES THE EQUIPMENT,MAINTAINS IT BEARS RISK OF OBSOLESCENCE. COULD BE WITH PURCHASE OPTION

OPERATING LEASE
CONTRACT IS FOR LESS THAN LIFE OF AN ASSET. LESSOR BEARS RISK OF OBSOLESCENCE, MAINTAINANCE,PAY TAX

SALE AND LEASE BACK CROSS BORDER LEVERAGE LEASE


3 PARTIES;LESSOR,LESSEE AND VENDOR LESSOR PAYS 20 TO 50% LOAN IS SECURED BY MORTGAGE

Financial lease Financial function Commitment to pay for the entire cost of equipment.

Operating lease Service function Does not pay more than the cost of equipment.

Lessee pays maintenance & taxes Risk of obsolescence is assumed by lessee Period ranges from medium to long Non cancellable contract Aircraft land & building

Maintenance expense & tax by the lesor Leasing company Short term Cancellable by lessor or lessee Computer office equipment

Advantages
Alternative use of fund Fast & cheap credit Flexibility( acc to lessee) Facilitate additional borrowing 100% financing Boon to small firm Protects against obsolescence( lessee in operating lease)

Disadvantages
Not suitable for project having long gestation period Lessee loses the advantage of increase price of land & building. Cost of financing is higher A lessee cant terminate the contract even if wants to discontinue then product line. If lessee doesnt pay rentals then loss for lessor

INCOME TAX PROVISION


LESSEE CAN CLAIM RENTALS AS TAX DEDUCTIBLE EXPENSE. RENTAL TAXABLE FOR LESSOR UNDER PROFIT & GAIN OF BUSINESS LESSOR CAN CLAIM DEPRECIATION

SALES TAX PROVISION


LESSOR CANT GET CONCESSIONAL RATE OF CST SINCE IT IS NOT FOR RESALE OR MANUFACTURE. SALES TAX IS APPLICABLE ACC. TO MANY STATE.

PROBLEMS
Unhealthy competition- over supply of lessors Lack of qualified professional Tax-relief for lessee but becomes lessors burden, all taxes involved. Stamp duty Delayed payment of rent & bad debt adds to the cost.

Factors influencing leasing decision


Adequate Capital Liquidity Flexibility not there in case of buying because one time payment but it is there in leasing through tailor made repayment schedule. Nature of asset-obsolete Debt capacity- it is off balance sheet financing. Grant & incentives available in purchase or leasing depending on Government. Finance Borrowing restriction

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