1.
LEASING, HIRE PURCHASE AND
VENTURE CAPITAL
SUBMITTED TO: SUBMITTED BY :
BARSHA
Dr. SAMEER DEEPAK RANA
GUPTA DIVA SAMNOTRA
GAUTAM KUMAR
HARVINDER SINGH
IBADAT SINGH SETHI

2.
Leasing

3.
Meaning of Lease and Leasing
• A lease is a contractual arrangement calling for
the lessee (user) to pay the lessor (owner) for use of
an asset
• 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.

4.
Important Terms:
• Lessee is the receiver of the services or the assets
under the lease contract.
• Lessor is the owner of the assets.
• Tenancy is the relationship between the tenant and
the landlord.
• Term is the fixed or an indefinite period of time
involved in the lease contract.
• Rent is the consideration for the lease.

5.
Types of Lease:
Operating lease: Short term, cancellable lease
agreements. The lessor is responsible for the
maintaince and insurance of the asset. Example:
Tourist renting a car, Hotel rooms, etc.
Financial Lease: Long term non cancellable lease
contract. Example: Plant, Machinery, Building, Ships
and aircraft.
Sale and Lease-back: Special financial agreement in
which the user may sell an asset owned by him to the
lessor and lease it back from him. Example: shipping
Industry.

6.
Financial evaluation of leasing

7.
Two ways of evaluating…………………
1. Lessee’s point
of view
2. Lessor’s point
of view

8.
Lessee’s point of view:
Lease or borrow decisions:
Steps:
Calculate present value of net-cash
flow of the buying option-NPV(B)
Calculate present value of net cash
flow of the leasing option-NPV(L)
Decide whether to buy or lease the
asset or reject the proposal .

9.
How to decide…………………………………….
If NPV(B) is positive and greater
than NPV(L) then

10.
• If NPV(L) is positive and greater
than the NPV(B)
then lease the asset.

11.
• If NPV(B) as well as NPV(L)
are both negative,
reject the proposal

12.
From the lessor’s point of view
Present value Internal rate
method of return
method

13.
A. Present value method
• Determine cash outflows by deducting tax advantage
of owing an asset.
• Determine cash inflows after tax.
• Determine the present value of cash outflows and after
tax cash inflows by discounting at weighted average
cost of capital of the lessor.
• Decide in favour of leasing out an asset if p.v. of cash
inflows exceeds the p.v. of cash outflows i.e. if the NPV
is positive

14.
B. Internal rate of return method
• Rate of discount at which the present value of
cash inflows is equal to the present value of
cash outflows.
• Can be determined with the help of
mathematical formula.
• Can also be determined with the help of
present value tables.

15.
Advantages of Leasing:
• Leasing is less capital-intensive than purchasing,
so it is more suitable for a business
which has constraints on its capital.
• Leasing shifts risk to the lessor in cases
where Capital assets tend to fluctuate in value.

16.
Advantages of Leasing:
• Lease payments are considered expenses rather
than assets, which can be set off against revenue
when calculating taxable profit at the end of the
relevant tax accounting period.
• Leasing provides more flexibility to a business which
expects to grow in the relatively short term because
a lessee is not usually obliged to renew a lease at
the end of its term.

17.
Disadvantages of Leasing:
• Usually lease terms are rigid and
difficult to navigate in circumstances
where the business has to
change its operations substantially.
• Tactical legal considerations usually make it expedient for lessees to
default on their leases

18.
Disadvantages of Leasing:
• If the business is successful, lessors may
demand higher rental payments when leases
come up for renewal.
• A net lease may shift some or all of the
maintenance costs onto the tenant.

19.
Hire Purchase

20.
Meaning
The hire purchase Act
of India 1972, defines
a hire purchase
agreement as an
agreement under
which goods are let on
hire and under which
the hirer has an
option to purchase
them in accordance
with the terms of
agreement.

21.
It involves two parties:
Hirer: The party which receives the asset.
Hiree: The party which rents out the asset.

22.
Features:
• Hire purchase is based on an agreement in writing.
• The buyer takes possession of the goods at the time of
entering into contract.
• Each installment is treated as hire charges.
• Ownership transfer from the buyer to the seller on the
payment of the last instalment.
• The purchaser has the right to terminate the
agreement any time before the property passes.

23.
Hire Purchase Agreement
• Hire purchase agreement has to be in writing
and signed by both parties. The agreement
must contain-
• Description of the goods.
• Hire purchase price of the goods.
• The date of commencement of the
agreement.
• The number of installments ,amount, and due
date.

24.
Rights of the Hirer
• To buy the goods at any time by giving notice to the
owner and paying the balance of the HP price less a
rebate (each jurisdiction has a different formula for
calculating the amount of this rebate)
• To return the goods to the owner — this is subject to
the payment of a penalty to reflect the owner's loss of
profit but subject to a maximum specified in each
jurisdiction's law to strike a balance between the need
for the buyer to minimize liability and the fact that the
owner now has possession of an obsolescent asset of
reduced value

25.
• With the consent of the owner, to assign both
the benefit and the burden of the contract to
a third person. The owner cannot
unreasonably refuse consent where the
nominated third party has good credit rating
• Where the owner wrongfully repossesses the
goods, either to recover the goods plus
damages for loss of quiet possession or to
damages representing the value of the goods
lost.

26.
Hirer’s obligations
• To pay the hire installments
• To take reasonable care of the goods (if the
hirer damages the goods by using them in a
non-standard way, he or she must continue to
pay the installments and, if
appropriate, compensate the owner for any
loss in asset value)

27.
• to inform the owner where the goods will be
kept.
• A hirer can sell the products if, and only if, he
has purchased the goods finally or else not to
any other third party.
• it is pretty much similar to installment but the
main difference is of ownership.

28.
Rights of the Owner
• The owner usually has the right to terminate
the agreement where the hirer defaults in
paying the installments or breaches any of the
other terms in the agreement. This entitles
the owner:
• to forfeit the deposit
• to retain the installments already paid and
recover the balance due

29.
• to repossess the goods (which may have to be
by application to a Court depending on the
nature of the goods and the percentage of the
total price paid)
• to claim damages for any loss suffered.

30.
Advantages
• Expensive items such as machinery and plant can
be acquired without huge financial investment.
• Interest charged and depreciation of the vehicle
are tax deductible
• Terms can be flexible and fixed repayments make
for easy future budgeting.
• After full payment of the hire purchase
agreement, ownership of the goods is transferred
to the hirer.

31.
Disadvantages
1. Higher prices:
The buyer has to pay much higher prices than that payable on
cash purchase. The seller adds a margin to cover interest and
risk.
2. Transfer of Ownership:
The buyer does not get ownership of goods until last installment
paid. He cannot sell the goods before final payment.
3. Risk of bad debts:
When the buyer fails to pay installments, the seller may suffer
loss. He may have to spend money and time to recover goods
from the buyer.
4. Large investment:
The hire purchase seller has to invest considerable funds
because payments are received from buyers over a long period
of time.

32.
Difference between Leasing and Hire-
purchase
• Ownership of the Asset: In lease, ownership
lies with the lessor. The lessee has the right to
use the equipment and does not have an
option to purchase. Whereas in hire
purchase, the hirer has the option to
purchase. The hirer becomes the owner of the
asset/equipment immediately after the last
installment is paid.

33.
Difference between Leasing and Hire-
purchase
• Duration: Generally lease agreements are done
for longer duration and for bigger assets like
land, property etc. Hire Purchase agreements are
done mostly for shorter duration and cheaper
assets like hiring a car, machinery etc.
• Tax Impact: In lease agreement, the total lease
rentals are shown as expenditure by the lessee. In
hire purchase, the hirer claims the depreciation
of asset as an expense.

34.
Difference between Leasing and Hire-
purchase
• Extent of Finance: Lease financing can be
called the complete financing option in which
no down payments are required but in case of
hire purchase, the normally 20 to 25 % margin
money is required to be paid upfront by the
hirer. Therefore, we call it a partial finance like
loans etc.

35.
Difference between Leasing and Hire-
purchase
• Rental Payments: The lease rentals cover the
cost of using an asset. Normally, it is derived
with the cost of an asset over the asset life. In
case of hire purchase, installment is inclusive
of the principal amount and the interest for
the time period the asset is utilized.

36.
Difference between Leasing and Hire-
purchase
• Repairs and Maintenance: Repairs and
maintenance of the asset in financial lease is
the responsibility of the lessee but in
operating lease, it is the responsibility of the
lessor. In hire purchase, the responsibility lies
with the hirer.

37.
Difference between Leasing and Hire-
purchase
• Depreciation: In lease financing, the
depreciation is claimed as an expense in the
books of lessor. On the other hand, the
depreciation claim is allowed to the hirer in
case of hire purchase transaction.

38.
VENTURE CAPITAL

39.
VENTURE CAPITAL
Venture capital (VC) is financial capital provided to
early-stage, high-potential, high risk, growth startup
companies. In broad terms, venture capital is the
investment of long term
equity finance where the
venture capitalist earns
his return primarily In
the form of capital
gains.

40.
CHARACTERISTICS OF VENTURE
CAPITAL
• Illiquidity: Easy liquidity by cashing out in short-term is not an
option for venture capital funding.
• Long-term commitment: Venture capital financing is a long
term, illiquid investment, it is not repayable on demand.
• Equity participation: Venture capital is actual or potential
equity participation through direct purchase of
shares, options or convertible securities. The objective is to
make capital gains by selling-off the investment, once the
enterprise becomes profitable.
• Participation in management: Venture financing ensures
continuing participation of the venture capitalist in the
management of the entrepreneur’s business.

41.
STAGES IN VENTURE FINANCING
Early stage financing.
Expansion financing
Acquisition/ buyout.

42.
EARLY STAGE FINANCING
• Seed finance for supporting a concept or idea.
• R&D financing for product development.
• Start up capital for initial production and
marketing
• First stage financing for full-scale production
and marketing

43.
EXPANSION FINANCING
• Second stage financing for working capital and
initial expansion.
• Development financing for facilitating public
issues.
• Bridge financing for facilitating public issues.

44.
ACQUISITION/BUYOUT
• Acquisition Financing For Acquiring Financing
Or Another Firm For Further Growth.
• Management buyout financing for enabling
operating group to acquire firm or part of its
business.
• Turnaround financing for turning around a sick
unit.

45.
THE BUSINESS PLAN
• The B-Plan is to convince the venture capitalist that
the company and the management team have the
ability to achieve the stated goals within the
specified time.

46.
ESSENTIALS OF A BUSINESS PLAN
• EXECUTIVE SUMMARY
• BACKGROUND ON THE VENTURE
• THE PRODUCT OR SERVICE
• MARKET ANALYSIS
• MARKETING
• BUSINESS OPERATIONS
• THE MANAGEMENT TEAM
• FINANCIAL PROJECTIONS
• AMOUNT & USE OF FINANCE REQD.
AND EXIT OPPORTUNITIES

47.
PROCESS OF VENTURE CAPITAL
FINANCING
• Deal Origination.
• Screening.
• Due diligence.
• Preliminary evaluation
• Detailed evaluation
• Deal Structuring.
• Post-investment Activity.
• Exit plan.

48.
PROCESS OF VENTURE CAPITAL
FINANCING
Referral
System
DEAL ORIGINATION
Active
Intermediaries
Search

49.
PROCESS OF VENTURE CAPITAL
FINANCING
• SCREENING

50.
PROCESS OF VENTURE CAPITAL
FINANCING

51.
PROCESS OF VENTURE CAPITAL
FINANCING
RISK
ANALYSIS

52.
PROCESS OF VENTURE CAPITAL
FINANCING
• PRODUCT RISK
• MARKET RISK
• TECHNOLOGICAL RISK
• ENTREPRENEURIAL RISK

53.
PROCESS OF VENTURE CAPITAL
FINANCING
• DEAL STRUCTURING

54.
PROCESS OF VENTURE CAPITAL
FINANCING
• POST INVESTMENT ACTIVITIES

55.
EXIT PLAN

56.
METHODS OF VENTURE FINANCING
• EQUITY
When a venture capitalist contributes equity
capital, he acquires the status of an owner and
becomes entitled to share in the firm’s profits as
much as he is liable for losses.

57.
METHODS OF VENTURE FINANCING
• CONDITIONAL LOAN
A conditional loan is repayable in the form of a
royalty after the venture is able to generate
sales. In India VCF’s charge 2-15% royalty.

58.
METHODS OF VENTURE FINANCING
• INCOME NOTE
It is a hybrid security which combines the
features of both conventional and conditional
loan. The entrepreneur has to pay both interest
and royalty on sales but at low rates.

59.
REFERENCES
• www.wikipedia.com
• I M Pandey
• www.investopedia.com
• www.gaurdian.uk.co
• www.amazon.com
• www.scribd.com
• www.managementparadise.com