Page 56 - DMGT207_MANAGEMENT_OF_FINANCES

Unit 3: Sources of Finance

5. Improved performance as reflected through improved turnover of assets. Notes
6. Governance and flexibility-by adjusting the term based on losses) requirements.
7. Maintenance and specialized services: Under a full service lease, the lessee receives
maintenance and other specialized services. Even in other types of lease, it is generally
common to have maintenance provided by the lessor, thus absolving the lessee of the
maintenance arrangement.
8. Lower administrative cuts as compared to other source of finance.

Disadvantages

1. Risk of being deprived of the use of equipment of the lessors (owners) financial condition
worsens, or if the leasing company is worried up, the lessee may be deprived of the use of
the equipment thus disrupting normal manufacturing operations.
2. Alteration/change in the asset: Under the lease, the lessee is generally prohibited from
making alterations/improvements on the leased asset without the prior approval of the
lessor (the owner).
3. Terminal value of the asset: In case of assets (such as land and buildings), which have high
terminal value at the end of the lease term, it would be more appropriate to own the asset
than to lease it.
4. To make lease payments even if the asset has become obsolete. If a lessee leases an asset
that subsequently becomes obsolete, it still must make lease payments over the remaining
term of the lease. This is true even if the asset is unsalable.

Hire Purchase

Very similar to leasing is hire purchase except that in hire purchase, the ownership will
be transferred to the buyer after all the hire purchase installments are paid up. With many
non-banking finance companies offering the leasing and hire purchase of equipments, many
companies are opting for this route to finance their fixed assets.

Self Assessment

Fill in the blanks:
12. Lease agreements are divided into two major ones – operating lease and ……………lease.
13. …………….. lease is for periods shorter than the useful life of the asset and is cancelable at
the option of the lessee.

3.7 Deferred Credit

The deferred credit facility is offered by the suppliers of machinery, whereby the buyer can pay
the purchase price in installments spread over a period of time. The interest and repayment
period are negotiated between the supplier and the buyer.

Notes Bill rediscounting scheme, supplier's line of credit, seed capital assistance and risk
capital foundation schemes offered by financial institutions are examples of deferred
credit scheme.

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