SPECIALISED FINANCIAL SERVICES

HIRE-PURHASE

Definition

Sec 2(1) of Hire-Purchase Act 1967: a letting of goods with an option to purchase & an agreement for the purchase of goods by installments A hire of goods under which the hirer(debtor) has possession of the goods with an option to purchase & an obligation to make payments to the owner of the goods (usually the finance company) every month for a period of time

HIRE-PURHASE

Characteristics

The hirer has every intention to purchase & become the owner of the goods Ownership does not pass to the hirer until he exercise the option to purchase A type of credit arrangements (granted by the retailer/finance company) The owner (retailer/finance company) has a statutory right to repossess the goods to enforce the security

HIRE-PURHASE

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Overview
Finance company purchase goods from supplier 10% down payment; 90% financing Hirer agree to pay installment within an agreed period of time Ownership of the goods belongs to the finance company until the hirer pays all the installments plus interest

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HIRE-PURHASE

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Categories
Consumer hire-purchase
Individual customers for the purchasing consumer goods Business customers for purchasing fixed asset the purpose of

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Commercial/Industrial hire-purchase
purpose of

HIRE-PURHASE

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Types of Hire-Purchase
Direct HP Direct collection with recourse to dealer Schedule collection agency

HIRE-PURHASE

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Types of Hire-Purchase
Direct HP Direct dealing whereby an appointed dealer makes an offer to purchase goods Hirer approaches a finance company for financing & if accepted, finance company is responsible for collections from the hirer over a specified period of the loan

HIRE-PURHASE

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Types of Hire-Purchase
Direct HP Once accepted, finance company bears the full risk of the loan & entire credit risk Duty & responsibility of the finance company to process the hire-purchase transaction

HIRE-PURHASE

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Types of Hire-Purchase
Direct collection with recourse to dealer The appointed dealer is required to enter into a master agreement with finance company Any changes to be made against the hirepurchase agreement, requires consent of the dealer An agreed rate of commission is payable to the dealer upon full or early settlement by the hirer

HIRE-PURHASE

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Types of Hire-Purchase
Direct collection with recourse to dealer Finance company responsible for the documentations & collection of rentals Normally for the purchase of heavy equipment & machinery/motor vehicles Risk & loss is born by the dealer

HIRE-PURHASE

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Types of Hire-Purchase
Schedule collection agency The dealer merely acts as an agent of the finance company A master agreement should be signed by finance company with the dealer together with a guarantee agreement Whether or not the dealer collects from the hirer, the dealer has to promptly remit the installments to finance company

LEASING

Definition
Is a contract between two parties, namely the lessor & the lessee, where: Lessor agrees to buy a certain specific chattel & rents it to the lessee The lessee agrees to rent the specific chattel from the lessor at a specific sum of rental over a specified period of time Whereas the lessee has the right to use the chattel, lessor retains the ownership

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LEASING

Definition
A written contract between a leasing company (lessor) & the user of the equipment (lessee), whereby the lessee agrees to pay a specified sum of rentals over an obligatory period of time in consideration for the use of capital equipment owned by the lessor without the lessee having to purchase or own the equipment

LEASING

Definition
The lessor retains ownership of the equipment & seeks to recover the capital cost of the equipment plus an amount equivalent to a financing charge out of the lease rentals receivable during the period of the lease

LEASING

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Advantages to lessee
Capital is conserved as leasing requires minimum or no capital outlay Rental payments are fully tax deductible expenses Eliminates the possibility of owning obsolete equipment Preserves existing credit-worthiness

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LEASING

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Advantages to lessee
Offers a cash flow advantage Attractive since worn equipment can be replaced at the end of a tailor-made lease May act as a hedge against inflation Aids corporate planning since it is fixed & regular

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LEASING

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Disadvantage to lessee
Non-cancellable & thus lessee is irrevocably committed to future payments of rental Less attractive if lessee is eligible for a special ownership allowance, investment tax credit or pioneer status Does not provide for a grace period on principal payment pending the commissioning of an equipment

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LEASING

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Advantages to lessor
Ownership of the asset rests with the lessor Offer better returns than lending An asset-based form of financing. Thus lessor is always secured Able to diversify services & retain his customers loyalty

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LEASING

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Disadvantage to lessor
Asset may be obsolete at the end of the lease May have difficulty to dispose the asset Takes the risk if lessee default on his rental payments Asset may not be maintained properly by the lessee Held liable for claims by third parties

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LEASING

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How leasing works?

Lessee identify the equipment that he wants Lessee enquire the price from manufacturer or supplier Apply to lessor to finance the purchase of the equipment Lessor assess the credit worthiness of the lessee Lessor purchase the equipment & allow lessee the exclusive use of the equipment Lessee pays lessor periodic rental for a specified period

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LEASING

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Forms of leasing
Financial lease
Lessor act as a financier Payments by lessee over the lease period cover the full cost of the asset plus interest to the lessor for his investment

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Operation lease

Usually for a short period of time Does not cover the useful life of the asset Rental does not fully recover the cost of the asset

LEASING

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Types of leasing
Full payout lease/financial lease
Lessor recovers the full cost of his capital plus an amount equivalent to his interest charges for the lease period During the primary lease period, the contract is non-cancellable No capital outlay (deposit) or residual value; may required to pay prepaid rent

LEASING

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Types of leasing
Non-full payout lease/security deposit lease

Lessor does not recover his full capital during the initial period There is a residual value at the end of the initial lease period The period of lease is always less than the useful economic life of the equipment
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Residual value lease with full financing Residual value lease with partial financing

FACTORING

Definition

The purchase of Account Receivable (AR) on a without recourse notification basis Not a loan to customer; amount of AR in the book keeping reduced by the amount factored

FACTORING

Characteristics

The outright purchase of the AR by the factor (bank) Risk of non-payment is assumed by the factor Customers buyers are notified of the factoring arrangement & are told to make payment direct to the factor

FACTORING

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Process
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Goods are delivered by the supplier Original invoice plus a copy raised by the supplier is sent to the factor Factor will advance up to 80% cash of the value of the invoice to the supplier; 20% retain as security Factor will forward invoice to the debtor & responsible to administer the AR At the end of credit period, debtor pays directly to the factor Factor will issue the receipt

FACTORING

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Types
Standard factoring Maturity factoring

Buyers are notified to pay directly to the factor

The factor provides the customer with a credit guarantee for his buyers The factor will provide the bank with a guarantee for making the advance to the customer

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Maturing with assignment of equity

Import factoring

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The factor provides AR book keeping & collection services For the import of goods on the basis trust receipt

FACTORING

Advantages
Customer is freed from the chores of collection of AR Customer is freed from risk of default by purchaser Customer have more time for sales activities Improved cash flow & able to take advantage of trade discounts The factor vet the credit worthiness of purchaser

REAL ESTATE FINANCING

What is real estate?

Involves land & structures built upon the land Can be classified as: Residential properties Agricultural land Commercial properties Industrial properties Recreational properties

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REAL ESTATE FINANCING

Unique characteristics
Land is immobile Lack of standardization
Different values

Long life
Varying age

Indestructibility
Durable & stable investment More often appreciate with time

REAL ESTATE FINANCING

Financing
Lending is given on a project by project basis Developers overall financial condition is assessed

Project is both the source of repayment & collateral for the loan

Financial strength Experience Responsibility & ability to invest the required equity