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Lease Financing Buy License Analyzing
Introduction to Finance (FIN2303)
Algonquin College
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Lease Financing Buy License Analyzing
Rating the Borrower
Before an investment company will agree to the terms of lending money they must first validate the state of the borrower to repay the loan.
Lending criteria commonly referred to as the C’s of Credit
Your book refers to the six c’s however most lenders use only five omitting the character– the proof of the borrower to act responsibly with the money as to ensure its repayment.
COLLATERAL: the form of asset offered as security against the monies being borrowed
CAPACITY: the ability of the borrower or company to generate enough money to repay the loan. To prove this the lender will often review the Cash Flow statement of the business.
CAPITAL: the overall financial structure of the business. The amount of equity to debt would be looked at under this category.
CIRCUMSTANCE: this would refer to the environment in which the business operates. This would include the study of trends and demands for the goods or services being produced by the business. Pricing, competition, profitability and regulations would also be considered.
Calculating the cost of borrowing
The Annual percentage Rate (APR) is just a calculation to help you compare the total cost of loans upfront (meaning the rate and the fees required to finance the loan). The APR is not the actual interest rate you will pay every year; it is just a calculation to help you make a better decision between different rate and fee combinations.
To use the formula let’s review the following problem
A business borrows $15,000 for 3 months 90 days
with a $300 finance cost.
Assuming that the principal is paid only at maturity the APR would be 8%
APR=(300/15000)*(365/90)
APR= 0*(365/90)
APR= 0* 4.
APR=8%
Lease financing is an excellent way to purchase and acquire the equipment needed for business activities.
Types of Leases
There are three main types of leases-
Operating
An operating lease is a lease whose term is short compared to the useful life of the asset or piece of equipment (an airliner, a ship, etc.) being leased. An operating lease is commonly used to acquire equipment on a relatively short-term basis.
Financial
A finance lease or capital lease is a type of lease in which a finance company is typically the legal owner of the asset during the duration of the lease, while the lessee not just has operating control over the asset, but also has a substantial share of the economic risks and returns from the change in the valuation.
Sale and Leaseback
A sale and leaseback constitutes an arrangement where the seller of an asset leases back the same asset from the purchaser.
The lease arrangement is made immediately after the sale of the asset with the amount of the payments and the time period specified. Essentially, the seller of the asset becomes the lessee and the purchaser becomes the lessor in this arrangement.
A leaseback arrangement is useful when companies need to untie the cash invested in an asset for other investments, but the asset is still needed in order to operate. Leaseback deals can also provide the seller with additional tax deductions. The lessor benefits in that they will receive stable payments for a specified period of time.
What are the advantages of lease financing?
There are five main advantages:
- A simple and quick financing application and approval process
- Protection of working capital and credit line
- Your borrowing capacity from banks is preserved and can be used for financing that only them can provide
- Your monthly rentals are tax deductible
Lease Financing Buy License Analyzing
Course: Introduction to Finance (FIN2303)
University: Algonquin College
