Sources Of Finance

 The term “Source” implies the agencies from which fund is

 This source of raising finance can be classified as into the following

categories on the basis of period for which fund is required .
 Long term  Medium term

 Short term

Medium-Term Finance
 To finance a business for a period of more than a year but less than

10 years.
 Also called as Intermediate financing.  Usually required for  Expansion or modernization of existing plant.  Purchase of assets or costly raw material.  For repayment of short-term loans.

Various Sources
       

Preference shares Debentures/Bonds Public deposits/Fixed deposits for a duration of three years. Commercial banks Financial institutions State financial corporations Lease financing Hire-purchase financing or Installment sale

Lease Financing
 A Lease is a transaction in which a party owning an asset/equipment

provides the asset/equipment for use to another party for an agreed period of time and in turn the party using the asset makes periodic payment to the owner of the asset.
 The lease can be a long term or medium term source of finance

depending upon the type of equipment:
 For eg. Land on lease  Lessor : Owner of the asset  Lessee : User of the asset under lease contract

Steps in Leasing Transaction
 Deciding the asset and the supplier
 Terms & Conditions
 Basic lease period (irrecoverable)  Timing and amount of payment

 Details regarding repairing & maintenance
 Option to renew or purchase at the end

 Signing the deal  Lessor pays the manufacturer and assets go to lessee

Types of Lease
Financial Lease Sale & Lease Back And Direct Lease Operating Lease Leverage Lease Domestic and International Lease

Levarage Lease

Financial Lease

Operating Lease
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Sale and Lease back
 Owner sells the property to the leasing company which leases it

back to the owner.

Direct Lease
 Dipartite Lease : involves lessor and lessee

 Tripartite Lease : involves lessor, lessee and equipment supplier.

Leveraged Lease
 It involves lessor, lessee and lender.  Lessor puts in some money required to purchase the asset and

borrows the rest from a lender.

Domestic Lease
 All the parties involved are

International Lease
 Parties involved are domicile of

domicile of the same country.
 Equipment supplier’s domicile

different countries.
 Two types:

is immaterial.

1. import lease 2. cross border lease

Advantages of Lease Financing
To the Lessee:
 Financing of capital goods  Less costly  Simplicity

To the Lessor
 Full security  Tax benefits  High profitablity

 Tax benefits

 High growth potential

 Restriction on use of equipment  Loss of residual value  Long Term Expense

 Maintenance

 First Leasing was incorporated as the First Leasing Company of the

Country on September 10, 1973. Mr Farouk Irani promoted the Company.
 The major clients are CitiBank, Johnson & Johnson, Volvo, Seimens

Public Communications, ABB, ANZGrindlays, IDBI Bank, TELCO, Knoll Pharmaceuticals, Bayer among many other names.
 The NAELB is the only professional organization for the leasing

industry that holds its member to a Code of Ethics

Industries Served
 IT and ITES
 Banking  Financial Services  Consultancy

 Telecom
 Engineering  Energy  Data Research  Agro Products  Hospitality Industries

Key Products
 Software leasing
 Green energy and Windmills  Corporate jets  Cross border leasing

 Leasing of telecom towers
 Corporate loans  Leasing of high value rare cars such as the Mercedes Benz, the

Volvo, BMW and the Lamborghini

BLME (Bank of London and the Middle East)
 A US manufacturer of white goods required finance for the

acquisition of new forklift trucks that would be used at the manufacturers various warehousing facilities. BLME provided an operating lease facility in excess of $20 million.
 BLME negotiated a finance lease with a US railway operator for the

installation of cranes at one of its freight terminals.
 BLME funded a fleet of truck mounted drilling rigs for a US natural

gas producer.

Hire Purchasing
 Hire purchase is used to buy expensive
   

items which a person cannot afford to pay outright: e.g. a car A down payment is usually paid and the balance is paid over several months (monthly installments). Goods are let out on finance by a finance company to the hire purchaser customer Buyer is required to pay an equal amount of periodic installments during a given period. Ownership transfers at the payment of the last installment

Process in hire purchase
 The Dealer, contracts with finance co. for financing his hire purchase
     

deals. The customer selects the goods for HP, and dealer arranges for the complete set of documents. Down payment by customer on completion of proposal form. Dealer sends documents to finance co. with request to purchase the goods, and accept the HP transaction. The finance co. signs the agreement and sends copy along with EMI details to dealer. Dealer delivers the goods to the customer, property passes on to the finance co.. Hirer pays EMIs, and on last payment , the ownership passes on to him, with loan completion certificate by the finance co

Hire Purchase vs Leasing
Hire purchase Leasing The hire has the option to purchase the goods Is a method of financing business assets & consumer articles Depreciation & investment allowance can be claimed . Only the interest is tax component deductible . Hirer enjoys the salvage value of the asset In leasing the lessee has no option to buy the goods Is a method of financing business assets only . Depreciation & investment allowance cannot be Claimed . Entire lease rental is tax Deductible

Lessee does not enjoy the salvage value of the asset

Hire Purchase vs Leasing
20-25% deposit is required in hire purchase In hire purchase we purchase the goods The extent of finance is not 100% because of down payment Hirer bears the cost of maintenance Asset is shown in b/s of the hirer No deposit is required in Leasing

In leasing we rent the goods The extent of finance is 100% as no down payment required Maintenance cost is borne by the lessor except in finance lease Leased assets are shown by way of foot note only

 Development of Hire-purchase took two forms: consumer durables

and automobiles.  Consumer durables hire-purchase was promoted by the dealers in the respective equipment. Thus, Singer Sewing Machine company, or Murphy radio dealers would provide installment facilities on hirepurchase basis to the customers of their products.  The other side developed very fast - hire-purchase of commercial vehicles. The dealers in commercial vehicles as well as pure financing companies sprang up. The value of the asset being good and repossession being easy, this branch of financing activity flourished fast, although until recently, most of automobile financing business was in hands of family-owned businesses.

Companies providing Hire Purchase
          

SREI International Finance Sundaram Finance Cholamandalam Finance Mahindra & Mahindra GE Capital Present industry order Shriram Finance Tata Finance Countrywide Finance Citicorp

  Ravi M. Kishore- 6th edition  Khan and Jain 


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