FMGT 85

Special Topics in Financial Management

Gladys B. Dialino
Instructor I
Cavite State University - CEMDS
 CHAPTER 3
Special Financing
LEASE
FINANCING
LEASE FINANCING

• Lease financing is one of the

popular and common methods of
assets based finance, which is the
alternative to the loan finance.
Lease is a contract. A contract
under which one party, the leaser
(owner) of an asset agrees to grant
the use of that asset to another
leaser, in exchange for periodic
rental payments. Lease is
contractual agreement between
the owner of the assets and user
of the assets for a specific period
by a periodical rent.
Definition of Leasing

• Lease may be defined as a

contractual arrangement in which
a party owning an asset provides
the asset for use to another, the
right to use the assets to the user
over a certain period of time, for
consideration in form of periodic
payment, with or without a
further payment.
 • Parties: These are essentially two parties to a contract of lease
financing, namely the owner and user of the assets.

• Leaser / Lessor: Leaser is the owner of the assets that are being
leased. Leasers may be individual partnership, joint stock companies,
corporation or financial institutions.

Elements of • Lease / Lessee: Lease is the receiver of the service of the assets

Leasing under a lese contract. Lease assets may be firms or companies.

• Lease broker: Lease broker is an agent in between the leaser (owner)

and lessee. He acts as an intermediary in arranging the lease deals.
Merchant banking divisions of foreign banks, subsidiaries, banking
and private foreign banks are acting as lease brokers.

• Lease assets: The lease assets may be plant, machinery, equipment,

land, automobile, factory, building etc.
 • The term of lease is the period for
Term of which the agreement of lease
remains for operations. The lease
Lease term may be fixed in the agreement
or up to the expiry of the assets.
 • The consideration that the
lease pays to the leaser for
Lease Rental lease transaction is the
rental.
 • (A) Lease based on the term of lease
Type of Leasing • 1. Finance Lease
Leasing, as a financing • 2. Operating Lease
concept, is an
arrangement between • (B) Lease based on the method of lease
two parties for a • 1. Sale and lease back
specified period.
Leasing may be • 2. Direct lease
classified into different • (C) Lease based in the parties involved
types according to the • 1. Single investor lease
nature of the agreement.
The following are the • 2. Leveraged lease
major types of leasing • (D) Lease based in the area
as follows:
• 1. Domestic lease
• 2. International lease
Type of Leasing

1. Financing lease - Financing lease is also called as full payout lease. It is one of the long-term
leases and cannot be cancelable before the expiry of the agreement. It means a lease for
terms that approach the economic life of the asset, the total payments over the term of the
lease are greater than the leasers initial cost of the leased asset. For example: Hiring a factory,
or building for a long period. It includes all expenditures related to maintenance.

2. Operating lease - Operating lease is also called as service lease. Operating lease is one of
the short-term and cancelable leases. It means a lease for a time shorter than the economic
life of the assets, generally the payments over the term of the lease are less than the leaser’s
initial cost of the leased asset. For example: Hiring a car for a particular travel. It includes all
expenses such as driver salary, maintenance, fuels, repairs etc.
Type of Leasing

3. Sale and lease back - Sale and lease back is a lease under which the leasee sells
an asset for cash to a prospective leaser and then leases back the same asset,
making fixed periodic payments for its use. It may be in the firm of operating
leasing or financial leasing. It is one of the convenient methods of leasing which
facilitates the financial liquidity of the company.

4. Direct lease - When the lease belongs to the owner of the assets and users of
the assets with direct relationship it is called as direct lease. Direct lease may be
Dipartite lease (two parties in the lease) or Tripartite lease. (Three parties in the
lease)
Type of Leasing

5. Single investor lease - When the lease belongs to only two parties namely
leaser and it is called as single investor lease. It consists of only one investor
(owner). Normally all types of leasing such as operating, financially, sale and lease
back and direct lease are coming under this categories.

6. Leveraged lease - This type of lease is used to acquire the high level capital cost
of assets and equipment. Under this lease, there are three parties involved; the
leaser, the lender and the lessee. Under the leverage lease, the leaser acts as
equity participant supplying a fraction of the total cost of the assets while the
lender supplies the major part.
Type of Leasing

7. Domestic lease - In the lease

transaction, if both the parties
belong to the domicile of the same
country it is called as domestic
leasing.

8. International lease - If the lease

transaction and the leasing parties
belong to the domicile of different
countries, it is called as international
leasing
Advantages of Leasing

Financing of fixed asset - Lease finance helps to mobilize finance for large investment in land and building,
plant and machinery and other fixed equipment, which are used in the business concern.

Assets based finance - Leasing provides finance facilities to procure assets and equipment for the company.
Hence, it plays a important and additional source of finance.

Convenient - Leasing finance is convenient to the use of fixed assets without purchasing. This type of finance is
suitable where the company uses the assets only for a particular period or particular purpose. The company
need not spend or invest huge amount for the acquiring of the assets or fixed equipment.

Low rate of interest -Lease rent is fixed by the lease agreement and it is based on the assets which are used by
the business concern. Lease rent may be less when compared to the rate of interest payable to the fixed
interest leasing finance like debt or loan finance.
Advantages of Leasing
Simplicity - Lease formalities and arrangement of lease finance facilities are very simple and easy. If the
leaser agrees to use the assets or fixed equipment by the lessee, the leasing arrangement is mostly
finished.

Transaction cost - When the company mobilizes finance through debt or equity, they have to pay some
amount as transaction cost. But in case of leasing finance, transaction cost or floating cost is very less
when compared to other sources of finance.

Reduce risk - Leasing finance reduces the financial risk of the lessee. Hence, he need not buy the assets
and if there is any price change in the assets, it will not affect the lessee.

Better alternative - Now a days, most of the commercial banks and financial institutions are providing
lease finance to the industrial concern. Some of the them have specialized lease finance company. They
are established to provide faster and speedy arrangement of lease finance.
VENTURE CAPITAL
VENTURE CAPITAL

• The term Venture Capital fund

is usually used to denote
Mutual funds or Institutional
investors. They provide equity
finance or risk capital to little
known, unregistered, highly
risky, young and small private
business, especially in
technology oriented and
knowledge intensive business.
 What is Venture Capital?
• Venture capital is a form of private equity and a type of
financing that investors provide to startup companies
and small businesses that are believed to have long-
term growth potential.

• Venture capital generally comes from well-off investors,

investment banks and any other financial institutions.

• However, it does not always take a monetary form; it can

also be provided in the form of technical or managerial
expertise. Venture capital is typically allocated to small
companies with exceptional growth potential, or to
companies that have grown quickly and appear poised
to continue to expand.
 What is Venture Capital?

• Though it can be risky for investors who put up funds,

the potential for above-average returns is an
attractive payoff.

• For new companies or ventures that have a limited

operating history (under two years), venture capital
funding is increasingly becoming a popular – even
essential – source for raising capital, especially if they
lack access to capital markets, bank loans or other
debt instruments.

• The main downside is that the investors usually get

equity in the company, and, thus, a say in company
decisions.
 • Artesian
• CLFG Capital
• Core Capital
Notable • First Asia Venture Capital Inc
Venture • Gideon
• Golden Gate VC
Capital Firms • Investment & Capital Corporation of the Philippines
in Manila • Narra Ventures
• New Leaf Ventures
• Paco Sandejas
• Tallwood VC
CREDIT RATING
 CREDIT
RATING
• A credit rating is a quantified
assessment of the creditworthiness of a
borrower in general terms or with
respect to a particular debt or financial
obligation. A credit rating can be
assigned to any entity that seeks to
borrow money—an individual,
corporation, state or provincial
authority, or sovereign government.
CREDIT RATING
• A credit rating is a quantified assessment of the
creditworthiness of a borrower in general terms or
with respect to a particular debt or financial
obligation.
• A credit rating not only determines whether or not
a borrower will be approved for a loan or debt issue
but also determines the interest rate at which the
loan will need to be repaid.
• A credit rating or score can be assigned to any entity
that seeks to borrow money—an individual,
corporation, state or provincial authority, or
sovereign government.
 • To impose a healthy discipline on
borrowings.
• To lend greater belief to financial
and other representations.
• To facilitate formulation of public
guidelines on institutional
investment.
• To help merchant bankers, brokers
and regulatory authorities.
• To encourage the information
disclosure, better accounting
standards, etc.
• To reduce interest cost for highly
rated company
Objectives of Credit Rating
The Credit Score • A credit score is a three-digit number that
estimates how likely you are to repay borrowed
money. Credit-scoring companies plug information
from your credit reports into mathematical
formulas that produce your credit scores.
• A low credit score may not keep you from being
approved for credit, but you may have to pay a
higher interest rate or put money on deposit. You
also may have to pay more for car insurance or put
down deposits on utilities. Landlords might use
your score to decide whether they want you as a
tenant.
• A higher credit score can give you access to more
credit products — and at lower interest rates.
Borrowers with scores above 750 or so frequently
have many options, including the ability to qualify
for 0% financing on cars and for credit cards with
0% introductory interest rates.
Credit score ranges
• The most commonly used scoring models,
VantageScore 3.0 and FICO 8, have a credit score
range of 300 to 850. Creditors set their own
standards for what constitutes an acceptable
score, but these are general guidelines:
• A score of 720 or higher is generally considered
excellent credit.
• A score between 690 and 719 is considered good
credit.
• Scores between 630 and 689 are fair credit.
• And scores below 629 are poor credit.