Management of Financial Institutions

Leasing Companies:Basic Purpose of Leasing, Technological Benefits

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Management of Financial Institutions - MGT 604
Lecture # 33
Leasing Companies
1. A lease or tenancy is a contract that transfers the right to possess specific property. In
law, there are two types of property: historically, land is the more important because, under
normal circumstances, it holds the highest value in economically developed societies.
Ownership of land is an aspect of the system of real property or realty in common law
2. When structured as an operating lease, this is a form of financing that avoids the down
payment usually required for the purchase of equipment. Because leased equipment is not
owned by the company, it does not appear on the balance sheet. A financing lease does
appear on the balance sheet.
3. Don't be intimidated! For most people, leasing is an unfamiliar concept and therefore a
little scary, but leasing isn't any more difficult than purchasing a car. Fully understanding
how the leasing process works is the first step toward a positive leasing experience.
Leasing a vehicle is similar to renting a car, just for a longer time period. Like renting a car,
a person who leases pays a pre-determined rate to drive a vehicle for a pre-determined
amount of time. You never own the vehicle and return it when your lease is up. A person
who leases enjoys the benefits of driving a car without assuming the up-front costs, and
many of the risks of ownership.
Basic Purpose of Leasing
Bargain Purchase Option
A lease provision allowing the lessee, at its option, to purchase the equipment for a price
predetermined at lease inception that is substantially lower than the expected fair market
value at the date the option can be exercised.
A company or person who arranges, for a fee, transactions between lessees and lesser of an
Certificate of Acceptance
A document whereby the lessee acknowledges that the equipment to be leased has been
delivered, is acceptable, and has been manufactured or constructed according to
Economic Life
The period of time during which an asset will have economic value and be usable.
Effective Lease Rate
The effective rate (to the lessee) of cash flows resulting from a lease
Technological Benefits
Technology provides a needed and powerful edge in business; the following points examine
those benefits and let you decide how these benefits provide you with the needed edge in
Management of Financial Institutions - MGT 604
business. An equipment leasing arrangement provides you the edge you need without
running the expensive costs associated with purchasing state-of-the-art equipment.
Wider Options, Lesser Costs
With equipment leasing arrangement you are free to select your choice of equipment
without paying the full price. This advantage also comes with the fact that most business
equipment leasing companies will often handle everything from the maintenance to the
deployment of their equipment. Your company can save the costs associated with the
equipment as the leasing company usually gets price cuts on equipment and related services
since they buy in bulk.
Leasing Companies
Leasing has become increasingly important over the last few years. Uncertainty about future
tax legislation and strong pressure on costs in bulk business are the controlling factors in the
industry. A high level of product and market homogeneity for classical products, at the
same time as low customer loyalty, is forcing companies to adopt positive distinguishing
signs in the market.
Leasing Act
Leasing acts as a "hedge against inflation." Lease payments are fixed for the full term of the
lease and, therefore, not subject to inflationary increases. New equipment obtained today is
paid for with tomorrow's Rupees. A fixed lease payment enables you to effectively budget
and manage the acquisition of capital equipment. At the end of the lease, you may choose to
exercise the agreed upon purchase option or simply return the equipment. Leasing offers
you the most manageable and economical way of keeping up with evolving technologies. A
lease payment may include installation charges or other related out-of-pocket expenses.
Down payments are seldom required. Leasing helps establish additional credit resources for
your business. Current working capital is not used, which allows your business to use the
cash for other investments or possible expansion. A lease is a simple and economical way to
obtain the benefits of the latest technology without assuming the up-front costs, and risks, of
Simply defined, a lease is a usage agreement between an equipment owner and a user of that
equipment. The lessee pays a periodic fee, usually monthly, to the lesser for the use of the
equipment. Leases most often take the form of written contracts with specific terms and
conditions spelled out: length of term, amount and timing of payments, and any end-of-lease
conditions or restrictions. The lesser is usually viewed as the owner of the equipment during
the lease term, but depending on the type of lease you select either you or the lesser may be
able to claim the benefits of ownership for tax purposes. Regardless of which type of lease
you choose, the future expected value of the equipment (the residual value) is considered
when pricing most types of leases. The residual value is the lesson's estimate today of the
equipment's value when the lease term ends. Or in other words we can say that it is like
purchasing a car, a car lease typically lasts for 24, 36, or 48 months; the longer the lease the
lower the monthly payment. However, it's usually smarter to get a shorter lease. Your best
bet is to get a lease for the same amount of time the car is under warranty. Doing so insures
you are covered for most car problems for the entire time you are leasing the vehicle.
Statistics show most cars begin experiencing problems after being driven for 4 years;
therefore a lease term longer than 48 months should be carefully considered. Cars begin to
lose value immediately after purchase and continue to lose value until they are scrapped.
Management of Financial Institutions - MGT 604
They become less desirable as they accumulate wear and tear or are replaced by newer
models. This process is called depreciation. The cost of your lease depends on the expected
depreciation of the vehicle you are leasing. All cars have an expected depreciation. In other
words, before a car is leased for the first time, a dealer knows the vehicle's value, given
normal wear and tear, for each year after it leaves the lot. When leasing, the difference
between a car's original value and its value when the lease term is over, determines how
much will be paid during the lease. When leasing a car, you should have a clear
understanding of the vehicle's depreciation schedule. Some cars lose value faster than
others. For example, some local brands are usually bringing better lease rates than many
foreign brands because they are known to have low depreciation. Before leasing make sure
you understand both the car's original value and its projected value at lease end, called the
residual value.
Leasing in Europe and United States of America
The global technology equipment leasing market is worth an estimated US$25 billion a year
and continues to grow rapidly. Currently, the Europe claims the lion's share of the market.
The concept is more deeply ingrained in the American culture where renting cars, houses
and even furniture is the norm. And, because it is so much part of the mainstream, US
businesses have historically been more receptive to the leasing message than their European
counterparts. The US is also more homogenous than Europe, in terms of both business
culture and financial and regulatory frameworks. However, largely because the business
arguments in favor of equipment leasing are so compelling, the market is now beginning to
take off in Europe. This article looks at the benefits of leasing and the reasons why IT
directors and facilities managers across Europe are increasingly adopting this method of
financing the acquisition of new equipment. With US-based equipment leasing companies
establishing a stronger presence in the region, more European businesses are being educated
on the advantages of this approach to asset finance. One of the most important benefits is
that leasing helps companies conserve cash.
Paying cash for equipment, or even making large down payments, can deplete reserves and
ultimately even lead to the business failing, if insufficient reserves are available to pay off
creditors on demand.
In contrast, leasing enables customers to retain their cash, by eliminating the need for down
payments. Many leasing packages provide 100 per cent financing and even cover "soft"
costs like shipping, installation and training. In addition, there are no application fees.
Instead, businesses are able to make affordable, flexible monthly payments. Today, leasing
options exist that let users design a financing plan around the needs of their business,
whether their priority is guaranteed ownership; the flexibility to return equipment; specified
purchase options or varying monthly payments to match seasonal cash flow. Customers can
even convert a recent purchase to a lease. To make certain their move into technology
equipment leasing is a success, businesses must also work with providers capable of
developing financial products tailored to their precise needs no matter the region in which
they are operating. Drawing on expertise gleaned from its long-term presence in 15
European countries, Key Equipment Finance is well positioned to do just this.
Table of Contents:
  1. Financial Environment & Role of Financial Institutions:FINANCIAL MARKETS &INSTITUTIONS
  2. FINANCIAL INSTITUTIONS:Non Banking Financial Companies
  3. CENTRAL BANK:Activities and responsibilities, Interest Rate Interventions
  4. POLICY INSTRUMENTS:Open Market Operations, Capital Requirements
  5. BALANCE OF TRADE:Balance of Payments Equilibrium, Public Policy and Financial Stability
  6. STATE BANK OF PAKISTAN:History, Regulation of Liquidity, Departments
  10. STATE BANK OF PAKISTAN - VARIOUS DEPARTMENTS (Contd.):Human Resources Department
  13. PAKISTAN ECONOMIC AID & DEBT:Macroeconomic Stability, Strengthening Institutions
  14. INCREASING FOREIGN DIRECT INVESTMENT:Industrial Sector, Managing the Debt
  15. ROLE OF COMMERCIAL BANKS:Services Typically Offered by Banks, Types of banks
  16. ROLE OF COMMERCIAL BANKS:Types of investment banks, The Management of the Banks
  17. ROLE OF COMMERCIAL BANKS:Public perceptions of banks, Capital adequacy, Liquidity
  19. ROLE OF COMMERCIAL BANKING:Private Deposit Insurance,
  20. BRANCH BANKING IN PAKISTAN:Remittances, Online Fund Transfer
  22. Mutual funds:Types of international mutual funds, Mutual funds vs. other investments
  23. Mutual Funds:Criticism of managed mutual funds, Money Market Fund
  24. Mutual Funds:Balanced Funds, Growth Funds, Specialized Funds, Measuring Risks
  25. Mutual Funds:Cost of Ownership, Redemption Fee, Reports to Shareholders
  26. Mutual Funds:Internet Fraud, The Pyramid Scheme, How to Avoid Investment Fraud
  27. Mutual Funds:Investing In International Mutual Funds, How to Pre-Select a Mutual Fund
  28. Role of Investment Banks:Recent evolution of the business, Possible conflicts of interest
  29. Letter of Credit:Elements of a Letter of Credit, Commercial Invoice, Tips for Exporters
  30. Letter of Credit and International Trade:Terminology, Risks in International Trade
  31. Foreign Exchange & Financial Institutions:Investment management firms, Exchange Traded Fund
  32. Foreign Exchange:Factors affecting currency trading, Economic conditions include
  33. Leasing Companies:Basic Purpose of Leasing, Technological Benefits
  34. The Leasing Sector in Pakistan and its Role in Capital Investment
  35. Role of Insurance Companies:Indemnification, Insurer’s business model
  36. Role of Insurance Companies:Life insurance and saving
  37. Role of financial Institutions in Agriculture Sector:What is “Revolving Credit Scheme”?
  38. Agriculture Sector and Financial Institutions of Pakistan:What is SMEs
  39. Can Government of Pakistan Lay a Pivotal Role in this Sector?:Business Environment
  40. Financial Crimes:Process of Money Laundering, Terrorist Financing
  41. DFIs & Risk Management:Managing Credit Risk, Managing Operational Risk
  42. Banking Fraud & Misleading Activities:Rogue Traders, Uninsured Deposits
  43. The Collapse of ENRON:Auditing Issues, Corporate Governance Issues, Corrective Actions
  44. Classic Financial Scandals:Corruption, Discovery, Black Wednesday