Professional Documents
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Project Finance
Defined by the International Project Finance Association (IPFA) as the following:
The financing of long-term infrastructure, industrial projects and public services based upon a non-recourse or limited recourse financial structure where project debt and equity used to finance the project are paid back from the cash flow generated by the project.
In other words, project financing is a loan structure that relies primarily on the project's cash flow for repayment, with the project's assets, rights, and interests held as secondary security or collateral. Project finance is especially attractive to the private sector because they can fund major projects off balance sheet.
Sources of Finance
Internal sources of finance
Personal savings Retained profits Working capital Sale of fixed assets Ownership capital Ordinary shares Preference shares Non-ownership capital Debentures Bank overdraft Loan Hire-purchase Lease Grant Venture capital Factoring Invoice discounting
Lease Financing
Lease financing denotes procurement of assets through lease.
its user (the lessee) for the right to use the asset during a specified period in return for a mutually agreed periodic payment (the lease rentals).
The important feature of a lease contract is separation of the
Grant: Why own a cow when the milk is so cheap? All you really need is milk and not the cow.
contract of leases.
Leasing contracts are more flexible so lessees can structure the leasing
etc.
Financial Lease
Long-term, non-cancellable lease contracts are known as
financial leases. The essential point of financial lease agreement is that it contains a condition whereby the lessor agrees to transfer the title for the asset at the end of the lease period at a nominal cost. Under this lease the lessor recovers 90% of the fair value of the asset as lease rentals and the lease period is 75% of the economic life of the asset. The lease agreement is irrevocable. Practically all the risks incidental to the asset ownership and all the benefits arising there from are transferred to the lessee who bears the cost of maintenance, insurance and repairs. Only title deeds remain with the lessor. Financial lease is also known as capital lease. In India, financial leases are very popular with high-cost and high technology equipment.
Operating Lease
An operating lease stands in contrast to the financial lease
in almost all aspects. This ease agreement gives to the lessee only a limited right to use the asset. The lessor is responsible for the upkeep and maintenance of the asset. The lessee is not given any uplift to purchase the asset at the end of the lease period. Normally the lease is for a short period and even otherwise is revocable at a short notice. Mines, Computers hardware, trucks and automobiles are found suitable for operating lease because the rate of obsolescence is very high in this kind of assets.
transaction is suitable for those assets, which are not subjected depreciation but appreciation, say land.
The advantage of this method is that the lessee can satisfy himself
completely regarding the quality of the asset and after possession of the asset convert the sale into a lease arrangement.
Leveraged Leasing
Under leveraged leasing arrangement, a third party is involved
beside lessor and lessee. The lessor borrows a part of the purchase cost (say 80%) of the asset from the third party i.e., lender. The lender is paid off from the lease rentals directly by the lessee and the surplus after meeting the claims of the lender goes to the lessor. The lessor, the owner of the asset is entitled to depreciation allowance associated with the asset.
LESSOR LESSEE
LENDER
Direct Leasing
asset from the manufacturer directly. The ownership of the asset leased out remains with the manufacturer
Lessor (the owner ) Lessee (the user) Lease broker (who acts as an intermediary in arranging lease deals.) Lease financier (who refinances the lessor)
Asset The asset, property or equipment to be leased is the subject matter of a contract of lease financing. Ownership separated from
user
The essence of a lease financing contract is that during the lease-tenure, ownership of the asset vests with the lessor and its use is allowed to the lessee. On the expiry of the lease tenure, the asset reverts to the lessor.
Lease Rentals
The consideration which the lessee pays to the lessor for the lease
the investment made in the asset (in the form of depreciation), the interest on the investment, repairs/insurance if any borne by the lessor, and servicing charges over the lease period.
From the lessee's angle, the structure of the lease rental should
and the pattern of cash flows of the lessee are periodicity of rentals, lease rentals in advance/arrear, profile of rentals and so on.
The lease rentals should ensure a given/ expected return to the
lessor.
the lessee is able to commence his business virtually without making any initial investment
Additional Source of Finance Leasing facilitates the acquisition of equipment, plant and machinery,]without the necessary capital outlay, and, thus, has a competitive advantage of mobilising the scarce in financial resources of the
business enterprise. It enhances the working capital position and makes available] the internal accruals for business operations.
Less Costly Leasing as a method of financing is less costly than other alternatives available.
Ownership Preserved Leasing provides finance without diluting the ownership or control of the promoters. As against it other modes of long-term finance, viz. equity or debentures, normally dilute the ownership of the promoters.
owner of the leased asset can take repossession of the asset if the lessee defaults. rate of return is more than w" the lessor pays on his borrowings. Also, the rate of return is more than in case of lending finance direct.
greater financial leverage. That is, they have a very low equity capital and use a substantial amount of borrowed funds and deposits. Thus, the ultimate return on equity is very high. potential. Lease financing enables the lessees to acquire equipment and machinery even during a period of depression, since they do not have to invest any capital. Leasing, thus, maintains the economic growth even during a recession.
Limitations of Leasing
Restrictions on Use of Equipment Limitations of Finance Lease Loss of Residual Value Consequences of Default Understatement of Lessee's Asset Double Sales Tax
Hire Purchase
purchaser, called the hirer, agrees to take the goods on hire at a stated rental, which is inclusive of the repayment of principal as well as interest, with an option to purchase.
Under this transaction, the hire purchaser acquires the property
(goods) immediately on signing the hire purchase agreement but the ownership or title of the same is transferred only when the last installment is paid.
condition that such person pays the agreed amount in periodic installments. The property in the goods is to pass to such person on the payment of the last of such installments, and Such person has a right to terminate the agreement at any time before the property so passes
Hire purchase is a type of installment credit under which the hire purchaser
agrees to take the goods on hire at a stated rental, which is inclusive of the repayment of principal as well as interest, with an option to purchase. Option is provided to the hirer (user). Only interest element included in the HP installments is revenue expenditure by nature. HP installments comprise of 3 elements normal trading profit finance charge recovery of cost of goods/assets
ByPriyanka Chauhan