Asset-Based Financing Dr Kavita

LEASE DEFINED
Lease is a contract under which a lessor, the owner of the assets, gives right to use the asset to a lessee, for a consideration called the lease rentals. In up-fronted leases Back ended leases.

TYPES OF LEASES
Operating Lease Financing Lease Sale and Lease Back

OPERATING LEASE
Shot-term, cancelable lease agreements are called operating lease. Tourist renting a car, lease contracts for computers, office equipments and hotel rooms. Lessor is responsible for maintenance and insurance. Risk of obsolescence remains with the lessor.

FINANCIAL LEASE
Long-term, non-cancelable lease contracts are known as financial lease. Examples are plant, machinery, land, building, ships and aircrafts. Amortise the cost of the asset over the terms of the leaseCapital or Full pay-out leases.

CASH FLOW CONSEQUENCES OF A FINANCIAL LEASE

Avoidance of the purchase price. Loss of depreciation tax shield. Aftertax payments of lease rentals.

SALE AND LEASE BACK

Sometimes, a user may sell an (existing) asset owned by him to the lessor (leasing company) and lease it back from him. Such sale and lease back arrangements may provide substantial tax benefits. Shipping Credit and Investment Corporation of India purchased Great Eastern Shipping Company bulk carrier, Jag Lata, for Rs 12.5 Cr and then leased it back to GESC on a 5 years lease, the rentals being Rs 28.13 Lakh per month. The ships WDV was Rs 2.5 Cr.

MYTHS ABOUT LEASING

Leasing Provides 100% Financing Leasing Provides Off-the-Balance-Sheet Financing. Leasing Improves Performance. Leasing Avoids Control of Capital Spending.

ADVANTAGES OF LEASING
Convenience and Flexibility. Shifting of Risk of Obsolescence. Maintenance and Specialized Services.

NET ADVANTAGE OF A LEASE METHOD

The direct cash flow consequences are: 1. The purchase price of the asset is avoided. 2. The depreciation tax shield Is lost. 3. The after tax lease rentals are paid. The net present value of these cash flows at after tax cost of debt should be calculated. If it is positive lease is beneficial.

DIFFERENCE - LEASING & HIRE PURCHASING

Hire Purchase Financing Hirer is entitled to claim depreciation Tax Shield. Hirer can charge only interest portion. Lease Financing Lessee is not entitled to claim depreciation tax shield. Lessee can charge the entire lease payments as expense for tax computation. Lessee does not become the owner of the asset. Therefore he has no claim over the asset salvage value.

Once the hirer has paid all instalments, he becomes the owner of the asset and can claim its salvage value.

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PROJECT FINANCING

Scheme of financing a particular economic unit in which a lender is satisfied in looking at the cash flows and the earnings of that economic unit as a source of funds, from which a loan can be repaid and to the assets of the economic unit as a collateral for the loan. It is different from the traditional form of financing

PROJECT FINANCING ARRANGEMENTS

The Build Own Operate Transfer Structure. The Build Own Operate Structure. The Build Lease Transfer Structure.