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.

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

Types of Lease:
Operating lease: Short term, cancellable lease agreements. The lessor is responsible for the maintaince and insurance of the asset. Example: Tourist renting a car, Hotel rooms, etc. Financial Lease: Long term non cancellable lease contract. Example: Plant, Machinery, Building, Ships and aircraft. 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. Example: shipping Industry.

Financial evaluation of leasing

Two ways of evaluating

1. Lessees point of view

2. Lessors point of view

Lessees 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.

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

From the lessors point of view

Present value method

Internal rate of return method

A. Present value method

Determine cash outflows by deducting tax advantage of owing an asset. Determine cash inflows after tax.

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

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 be determined with the help of mathematical formula. Can also be determined with the help of present value tables.

Advantages of Leasing:
Leasing is less capital-intensive than purchasing, so it is more suitable for a business which has constraints on its capital.

Leasing shifts risk to the lessor in cases where Capital assets tend to fluctuate in value.

Advantages of Leasing:
Lease payments are considered expenses rather than assets, which can be set off against revenue when calculating taxable profit at the end of the relevant tax accounting period. 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.

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, lessors may demand higher rental payments when leases come up for renewal.

A net lease may shift some or all of the maintenance costs onto the tenant.

Hire Purchase

Meaning
The hire purchase Act of India 1972, 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.

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

Features:
Hire purchase is based on an agreement in writing. The buyer takes possession of the goods at the time of entering into contract. Each installment is treated as hire charges. 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.

Hire Purchase Agreement

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

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. The owner cannot unreasonably refuse consent where the nominated third party has good credit rating Where the owner wrongfully repossesses the goods, either to recover the goods plus damages for loss of quiet possession or to damages representing the value of the goods lost.

Hirers 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, he or she must continue to pay the installments and, if appropriate, compensate the owner for any loss in asset value)

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

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. This entitles the owner: to forfeit the deposit to retain the installments already paid and recover the balance due

 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. Interest charged and depreciation of the vehicle are tax deductible Terms can be flexible and fixed repayments make for easy future budgeting. After full payment of the hire purchase agreement, ownership of the goods is transferred to the hirer.

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

Difference between Leasing and Hirepurchase

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

Difference between Leasing and Hirepurchase

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

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, the normally 20 to 25 % margin money is required to be paid upfront by the hirer. Therefore, we call it a partial finance like loans etc.

Difference between Leasing and Hirepurchase

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

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, it is the responsibility of the lessor. In hire purchase, the responsibility lies with the hirer.

Difference between Leasing and Hirepurchase

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

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 entrepreneurs business.

STAGES IN VENTURE FINANCING

Early stage financing. Expansion financing Acquisition/ buyout.

EARLY STAGE FINANCING

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

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

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

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.

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. AND EXIT OPPORTUNITIES

PROCESS OF VENTURE CAPITAL FINANCING

Deal Origination. Screening. Due diligence. Preliminary evaluation Detailed evaluation Deal Structuring. Post-investment Activity. Exit plan.

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

METHODS OF VENTURE FINANCING

EQUITY When a venture capitalist contributes equity capital, he acquires the status of an owner and becomes entitled to share in the firms profits as much as he is liable for losses.

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 VCFs 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.

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