LEASING, HIRE PURCHASE AND VENTURE CAPITAL

SUBMITTED TO:
Dr. SAMEER GUPTA

SUBMITTED BY :
BARSHA DEEPAK RANA DIVA SAMNOTRA GAUTAM KUMAR HARVINDER SINGH IBADAT SINGH SETHI

Leasing

Meaning of Lease and Leasing
• A lease is a contractual arrangement calling for the lessee (user) to pay the lessor (owner) for use of an asset

• Leasing is a process by which a firm can obtain the use of a certain fixed assets for which it must pay a series of contractual, periodic, tax deductible payments.

• Rent is the consideration for the lease.Important Terms: • Lessee is the receiver of the services or the assets under the lease contract. • Lessor is the owner of the assets. • Term is the fixed or an indefinite period of time involved in the lease contract. • Tenancy is the relationship between the tenant and the landlord. .

etc.Types of Lease: Operating lease: Short term. Hotel rooms. Building. Example: shipping Industry. Example: Tourist renting a car. Example: Plant. cancellable lease agreements. The lessor is responsible for the maintaince and insurance of the asset. Machinery. . Sale and Lease-back: Special financial agreement in which the user may sell an asset owned by him to the lessor and lease it back from him. Ships and aircraft. Financial Lease: Long term non cancellable lease contract.

Financial evaluation of leasing .

Two ways of evaluating………………… 1. Lessor’s point of view . Lessee’s point of view 2.

Lessee’s point of view: Lease or borrow decisions: Steps: Calculate present value of net-cash flow of the buying option-NPV(B) Calculate present value of net cash flow of the leasing option-NPV(L) Decide whether to buy or lease the asset or reject the proposal . .

How to decide……………………………………. If NPV(B) is positive and greater than NPV(L) then .

• If NPV(L) is positive and greater than the NPV(B) then lease the asset. .

reject the proposal .• If NPV(B) as well as NPV(L) are both negative.

From the lessor’s point of view Present value method Internal rate of return method .

• Determine the present value of cash outflows and after tax cash inflows by discounting at weighted average cost of capital of the lessor. if the NPV is positive .v.e. • Determine cash inflows after tax. Present value method • Determine cash outflows by deducting tax advantage of owing an asset. • Decide in favour of leasing out an asset if p. of cash inflows exceeds the p.v. of cash outflows i.A.

• Can be determined with the help of mathematical formula.B. Internal rate of return method • Rate of discount at which the present value of cash inflows is equal to the present value of cash outflows. • Can also be determined with the help of present value tables. .

. so it is more suitable for a business which has constraints on its capital.Advantages of Leasing: • Leasing is less capital-intensive than purchasing. • Leasing shifts risk to the lessor in cases where Capital assets tend to fluctuate in value.

• Leasing provides more flexibility to a business which expects to grow in the relatively short term because a lessee is not usually obliged to renew a lease at the end of its term. which can be set off against revenue when calculating taxable profit at the end of the relevant tax accounting period. .Advantages of Leasing: • Lease payments are considered expenses rather than assets.

Disadvantages of Leasing: • Usually lease terms are rigid and difficult to navigate in circumstances where the business has to change its operations substantially. • Tactical legal considerations usually make it expedient for lessees to default on their leases .

.Disadvantages of Leasing: • If the business is successful. • A net lease may shift some or all of the maintenance costs onto the tenant. lessors may demand higher rental payments when leases come up for renewal.

Hire Purchase .

defines a hire purchase agreement as an agreement under which goods are let on hire and under which the hirer has an option to purchase them in accordance with the terms of agreement. .Meaning The hire purchase Act of India 1972.

It involves two parties: Hirer: The party which receives the asset. . Hiree: The party which rents out the asset.

• Ownership transfer from the buyer to the seller on the payment of the last instalment. • The purchaser has the right to terminate the agreement any time before the property passes. • The buyer takes possession of the goods at the time of entering into contract. • Each installment is treated as hire charges.Features: • Hire purchase is based on an agreement in writing. .

• The number of installments . The agreement must contain• Description of the goods. • Hire purchase price of the goods. and due date. • The date of commencement of the agreement.Hire Purchase Agreement • Hire purchase agreement has to be in writing and signed by both parties.amount. .

Rights of the Hirer • To buy the goods at any time by giving notice to the owner and paying the balance of the HP price less a rebate (each jurisdiction has a different formula for calculating the amount of this rebate) • To return the goods to the owner — this is subject to the payment of a penalty to reflect the owner's loss of profit but subject to a maximum specified in each jurisdiction's law to strike a balance between the need for the buyer to minimize liability and the fact that the owner now has possession of an obsolescent asset of reduced value .

.• With the consent of the owner. to assign both the benefit and the burden of the contract to a third person. either to recover the goods plus damages for loss of quiet possession or to damages representing the value of the goods lost. The owner cannot unreasonably refuse consent where the nominated third party has good credit rating • Where the owner wrongfully repossesses the goods.

he or she must continue to pay the installments and.Hirer’s obligations • To pay the hire installments • To take reasonable care of the goods (if the hirer damages the goods by using them in a non-standard way. compensate the owner for any loss in asset value) . if appropriate.

. • it is pretty much similar to installment but the main difference is of ownership. • A hirer can sell the products if.• to inform the owner where the goods will be kept. he has purchased the goods finally or else not to any other third party. and only if.

This entitles the owner: • to forfeit the deposit • to retain the installments already paid and recover the balance due .Rights of the Owner • The owner usually has the right to terminate the agreement where the hirer defaults in paying the installments or breaches any of the other terms in the agreement.

• to repossess the goods (which may have to be by application to a Court depending on the nature of the goods and the percentage of the total price paid) • to claim damages for any loss suffered. .

Advantages • Expensive items such as machinery and plant can be acquired without huge financial investment. • After full payment of the hire purchase agreement. . • Interest charged and depreciation of the vehicle are tax deductible • Terms can be flexible and fixed repayments make for easy future budgeting. ownership of the goods is transferred to the hirer.

4. The seller adds a margin to cover interest and risk. 2. 3. Higher prices: The buyer has to pay much higher prices than that payable on cash purchase. He cannot sell the goods before final payment. . Large investment: The hire purchase seller has to invest considerable funds because payments are received from buyers over a long period of time. the seller may suffer loss. Transfer of Ownership: The buyer does not get ownership of goods until last installment paid.Disadvantages 1. Risk of bad debts: When the buyer fails to pay installments. He may have to spend money and time to recover goods from the buyer.

the hirer has the option to purchase. Whereas in hire purchase. ownership lies with the lessor. The hirer becomes the owner of the asset/equipment immediately after the last installment is paid. The lessee has the right to use the equipment and does not have an option to purchase. .Difference between Leasing and Hirepurchase • Ownership of the Asset: In lease.

machinery etc. the hirer claims the depreciation of asset as an expense.Difference between Leasing and Hirepurchase • Duration: Generally lease agreements are done for longer duration and for bigger assets like land. • Tax Impact: In lease agreement. . the total lease rentals are shown as expenditure by the lessee. In hire purchase. Hire Purchase agreements are done mostly for shorter duration and cheaper assets like hiring a car. property etc.

Difference between Leasing and Hirepurchase • Extent of Finance: Lease financing can be called the complete financing option in which no down payments are required but in case of hire purchase. we call it a partial finance like loans etc. the normally 20 to 25 % margin money is required to be paid upfront by the hirer. Therefore. .

Normally. .Difference between Leasing and Hirepurchase • Rental Payments: The lease rentals cover the cost of using an asset. installment is inclusive of the principal amount and the interest for the time period the asset is utilized. In case of hire purchase. it is derived with the cost of an asset over the asset life.

. it is the responsibility of the lessor.Difference between Leasing and Hirepurchase • Repairs and Maintenance: Repairs and maintenance of the asset in financial lease is the responsibility of the lessee but in operating lease. the responsibility lies with the hirer. In hire purchase.

the depreciation claim is allowed to the hirer in case of hire purchase transaction.Difference between Leasing and Hirepurchase • Depreciation: In lease financing. . On the other hand. the depreciation is claimed as an expense in the books of lessor.

VENTURE CAPITAL .

VENTURE CAPITAL
Venture capital (VC) is financial capital provided to early-stage, high-potential, high risk, growth startup companies. In broad terms, venture capital is the investment of long term equity finance where the venture capitalist earns his return primarily In the form of capital gains.

CHARACTERISTICS OF VENTURE CAPITAL
• Illiquidity: Easy liquidity by cashing out in short-term is not an option for venture capital funding. • Long-term commitment: Venture capital financing is a long term, illiquid investment, it is not repayable on demand. • Equity participation: Venture capital is actual or potential equity participation through direct purchase of shares, options or convertible securities. The objective is to make capital gains by selling-off the investment, once the enterprise becomes profitable. • Participation in management: Venture financing ensures continuing participation of the venture capitalist in the management of the entrepreneur’s business.

STAGES IN VENTURE FINANCING Early stage financing. Expansion financing Acquisition/ buyout. .

EARLY STAGE FINANCING • Seed finance for supporting a concept or idea. • Start up capital for initial production and marketing • First stage financing for full-scale production and marketing . • R&D financing for product development.

.EXPANSION FINANCING • Second stage financing for working capital and initial expansion. • Bridge financing for facilitating public issues. • Development financing for facilitating public issues.

• Management buyout financing for enabling operating group to acquire firm or part of its business. • Turnaround financing for turning around a sick unit.ACQUISITION/BUYOUT • Acquisition Financing For Acquiring Financing Or Another Firm For Further Growth. .

.THE BUSINESS PLAN • The B-Plan is to convince the venture capitalist that the company and the management team have the ability to achieve the stated goals within the specified time.

AND EXIT OPPORTUNITIES .ESSENTIALS OF A BUSINESS PLAN • • • • • • • • • EXECUTIVE SUMMARY BACKGROUND ON THE VENTURE THE PRODUCT OR SERVICE MARKET ANALYSIS MARKETING BUSINESS OPERATIONS THE MANAGEMENT TEAM FINANCIAL PROJECTIONS AMOUNT & USE OF FINANCE REQD.

Exit plan. Preliminary evaluation Detailed evaluation Deal Structuring. . Due diligence. Post-investment Activity. Screening.PROCESS OF VENTURE CAPITAL FINANCING • • • • • • • • Deal Origination.

PROCESS OF VENTURE CAPITAL FINANCING Referral System DEAL ORIGINATION Active Search Intermediaries .

PROCESS OF VENTURE CAPITAL FINANCING • SCREENING .

PROCESS OF VENTURE CAPITAL FINANCING .

PROCESS OF VENTURE CAPITAL FINANCING RISK ANALYSIS .

PROCESS OF VENTURE CAPITAL FINANCING • • • • PRODUCT RISK MARKET RISK TECHNOLOGICAL RISK ENTREPRENEURIAL RISK .

PROCESS OF VENTURE CAPITAL FINANCING • DEAL STRUCTURING .

PROCESS OF VENTURE CAPITAL FINANCING • POST INVESTMENT ACTIVITIES .

EXIT PLAN .

he acquires the status of an owner and becomes entitled to share in the firm’s profits as much as he is liable for losses.METHODS OF VENTURE FINANCING • EQUITY When a venture capitalist contributes equity capital. .

.METHODS OF VENTURE FINANCING • CONDITIONAL LOAN A conditional loan is repayable in the form of a royalty after the venture is able to generate sales. In India VCF’s charge 2-15% royalty.

METHODS OF VENTURE FINANCING • INCOME NOTE It is a hybrid security which combines the features of both conventional and conditional loan. The entrepreneur has to pay both interest and royalty on sales but at low rates. .

uk.amazon.gaurdian.wikipedia.REFERENCES • • • • • • • www.co www.com www.com .scribd.com I M Pandey www.managementparadise.com www.com www.investopedia.