Unit 11: Leasing and Factoring
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.
Under
normal circumstances, an owner of property is at liberty to do what they want
with their property.
However,
if the owner has surrendered possession to another (i.
e.
the
tenant) then any interference with the quiet enjoyment of the property by the
tenant in lawful possession is unlawful.
A
lease contract can be classified on various characteristics in many categories
like Finance Lease and Operating Lease; Sales & Lease back and Direct
Lease; Single investor and Leveraged lease and Domestic and International
lease.
There
are many financial, legal and tax related aspects of leasing.
Financially,
leasing is more advantageous than harmful.
But
in India, the tax benefits given to the leasing companies are not substantially
as good as their counterparts in developed economies.
Factoring
may be defined as the relationship, created an agreement, between the seller of
goods/services and a financial institution.
Forfeiting
is trade finance extended by a forfeiter to an exporter seller for an
export/sale transaction involving deferred payment terms over a long period at
a firm rate of discount.
In
addition to the rendering of factoring services, banks financial institutions
also provide bills discounting facilities provide finance to the client.
Indian
Financial System The bill of exchange
is an instrument in writing containing an unconditional order, signed by the
maker, directing a certain person to pay a certain sum of money only to, or to
the order of, a certain person, or to the bearer of that instrument.
Account
receivables: Any trade debt arising from the sale of goods/ services by the
client to the customer on credit.
Client:
He is also known as supplier.
It
may be a business institution supplying the goods/ services on credit and
availing of the factoring arrangements.
Contract:
A contract is an agreement enforceable by law.
Contract
of indemnity: A contract whereby a person promises to make good the loss caused
to him by the conduct of the promisor himself or any third person.
Customer:
A person or business organisation to whom the goods/ services have been
supplied on credit.
He
may also be called as debtor.
Eligible
debt: Debts, which are approved by the factor for making prepayment.
Lease:
Lease is a contract conferring a right on one person (called a tenant or
lessee) to possess property belonging to another person (called a landlord or
lessor) to the exclusion of the owner landlord.
Open
account sales: Where in an arrangement goods/ services are sold/supplied by the
client to the customer on credit without raising any bill of exchange or
promissory note.
Prepayment:
An advance payment made by the factor to the client up to a certain percent of
the eligible debts.
Retention:
Margin maintained by the factor.