Apart from the above mentioned sources of finance, there are several other ways in which finance may be obtained. These include:
1. Deferred credit
2. Lease finance
3. Hire purchase
4. Unsecured loans and deposits
5. Special schemes of institutions
6. Subsidies and sales tax deferments and exemptions
7. Short term loans from financial institutions
8. Commercial paper
Here we are discussing about the first two.
Many times the suppliers of machinery provide deferred credit facility under which payment for the purchase of machinery is made over a period of time. The interest rate on deferred credit and the period of payment vary rather widely. Normally, the supplier of machinery, when he offers deferred credit facility, insists that the bank guarantee should be furnished by the buyer.
A lease represents a contractual arrangement whereby the lesser grants the lessee the right to use an asset in return for periodic lease rental payments. While leasing of land, building and animals has been known from times immemorial, the leasing of industrial equipments is a relatively new phenomenon, particularly on the Indian scene.
There are two broad types of lease: finance lease and operating lease. A fiancé lease or capital lease is essentially a form of borrowing. Its salient features are:
It is an intermediate term to long term non-cancelable arrangement. During the initial lease period, referred to as the primary lease period, which is usually 3 years or 5 years or 8 years, the lease cannot be cancelled.
The lease is more or less fully amortized during the primary lease period. This means that during this period, the lesser recovers, through the lease rentals, his investment in the equipment along with an acceptable rate of return. Thus, a finance lease transfers substantially all the risks and rewards incidental to ownership to the lessee.
The lessee is responsible for maintenance, insurance and taxes.
The lessee usually enjoys the option for renewing the lease for further periods at substantially reduced lease rentals.
An operating lease can be defined as any lease other than a finance lease. The salient features of an operating lease are:
The lease term is significantly less than the economic life of the equipment.
The lessee enjoys the right it terminate the lease at short notice without any significant penalty.
The lesser usually provides the operating know-how and the related services and undertakes the responsibility of insuring and maintaining the equipment. Such an operating lease is called a wet lease. An operating lease where the lessee bears the costs of insuring and maintaining the leased equipment is called a dry lease.
From the above features of an operating lease it is evident that this form of lease does not result in a substantial transfer of the risks and rewards of ownership from the lesser to the lessee. The lesser structuring and operating lease transaction has to depend on multiple leases or on the realization of a substantial resale value (on expiry of the first lease) to recover the investment cost plus a reasonable rate of return thereon. Therefore, specializing in operating lease calls for an in-depth knowledge of the equipments and the secondary (resale) market for such equipments. Of course, the prerequisite is the existence of a resale market. Given the fact the resale market for most of the used capital equipments in our country lacks breadth, operating leases are not in popular use. In recent years there have been attempts to structure car lease and computer lease transaction in the operating lease format.
At present, the following are the key characteristics of lease finance in India.
1. Most leases in India are finance leases not operating leases.
2. Lease finance is available for identifiable performing assets.
3. Lease finance is available in small volume
4. There is a great deal of flexibility in structuring lease finance.
5. Lease of immovable assets is not possible by banks
6. Lease tenors up to eight years are available.