FIN 426 Specialised financial services Group Member’s Noor Amira Binti Ramli 2013694044 Noor Effa Rizan Binti Rusdi 2013410822 Nurhasma Zalina Binti Che Mahd Nasir 2013273682
Jun 20, 2015
FIN 426Specialised financial
services
Group Member’s
Noor Amira Binti Ramli2013694044Noor Effa Rizan Binti Rusdi 2013410822Nurhasma Zalina Binti Che Mahd Nasir2013273682
HIRE PURCHASE
DEFINITION
“a letting of goods with an option to purchase & an agreement for the
purchase of goods by installments”
Sec 2(1) of Hire-
Purchase Act 1967:
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 PURCHASE
PARTY INVOLVE OF
HP
HIRER
FINANCIER/BANK
DEALER
CHARACTERISTICS
The owner has a statutory right to
repossess the goods to enforce the security.
A type of credit arrangements
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
Ownership does not pass to the hirer until he exercise the option
to purchase
A type of credit arrangements
Ownership does not pass to the hirer until he exercise the option
to purchase
HIRE PURCHASE
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
HIRE PURCHASE
CATEGORIES
Consumer HP
Commercial/Industrial HP
Individual customers for the purpose of purchasing consumer goods
Business customers for the purpose of purchasing fixed asset
HIRE PURCHASE
HP AGREEMENT-SEC 4C OF THE HP ACT 1967
1. Description2. Time period3. Number of installment & time of payment4. Amount of installment5. Who & the place of payment6. Where the goods to be located7. Cash price of the goods8. HP price9. Deposit amount10.Reasonably comprehensive statement of the
parties’ rights11. The right of the hirer to terminate contract12.A guarantor13. Insurance coverage
HIRE PURCHASE
1. Pay the hirer installments2. Pay interest on overdue installment3. take reasonable care of the goods4. Inform the owner where the goods will be
kept5. A hirer can sell the products if & only he has
purchased the goods
OBLIGATION HAVE TO FULFILL BY THE HIRER
HIRE PURCHASE
TYPES OF HP
Direct HP Direct collection with recourse to dealer
Schedule collection – agency
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
Once accepted, finance company bears the full risk of the loan & entire
credit risk
Duty & responsibility of the finance company to
process the HP transaction
HIRE PURCHASE
Direct
colle
ction
with
recourse
to
dealer
1. The appointed dealer is required to enter into a master agreement with finance company
2. Any changes to be
made against the HP
agreement, requires
consent of the dealer
3. An agreed rate of commission is
payable to the dealer upon full or early settlement by the
hirer
4. Finance company responsible for the documentations &
collection of rentals
5. Normally for the
purchase of heavy
equipment &
machinery/motor vehicles
6. Risk & loss is
born by the dealer
HIRE PURCHASE
Schedule collection – agency
1. The dealer merely acts as an agent of
the finance company
2. A master agreement should be signed by
finance company with the dealer together with a guarantee agreement
3. Whether or not the dealer collects from the hirer, the dealer
has to promptly remit the installments to finance company
HIRE PURCHASE
RIGHT TO TERMINATE
THE AGREEMENT
To forfeit the
deposit
To retain the installments
already paid and recover the balance due
To repossess the goods
To claim damages for
any loss suffered
OWNER CAN
HIRE PURCHASE
Leasing
It is a contractual agreement between a lessor and a lesse
It is also alternative to purchasing the assets.
Period: 1 to 5 year
Some lease at the end of the lease term provide an option to purchase equipment at a lesser amount
No large outlay
Allow to use better
equipment
Preserves credit lines
Increase purchasing
powers
Provides fixed rate financing
Leasing conserves
working capital
Provides option at the end of lease term
Advantages of Leasing
1. Lessee identify the equipment that he wants
2. Lessee enquire the price from manufacturer or supplier
3. Apply to lessor to finance the purchase of the equipment
4. Lessor assess the credit worthiness of the lessee
5. Lessor purchase the equipment & allow lessee the exclusive use of the equipment
6. Lessee pays lessor periodic rental for a specified period
How leasing works?
No ownershipLong term expenses
Cost of maintaining the
asset
Disadvantages of Leasing
Type of Leasing
1. Financial or capital Lease
2. Operating Lease3. Sale and
Leaseback
Type of Leasing
1. It is non-cancellable contractual
agreement between a lessor and a lessee
2. Leasing company recover full cost of
equipment + charges over time of period
4. Customer responsibility for maintaining the
assets.
3. End of period, the leasing company usually agree to
secondary lease period in return reduced
payment. 5. Is customer wishes
to stop using the equipment, it must be sold second hand to
an unrelated third party
1. Financing or Capital Lease
Advantages Disadvantages
Financing/capital leasing
Asset cost = RM 50 000Lease Financing = RM50 000Lease Period = 3yearsInterest Value =10% per asset
Monthly Lease Payment = RM50 000 + (RM50 000 X 10% X 3) = RM1 805.56
Example calculation of lease rentals:
2. Operating Lease or Service/ Maintenance Lease
• It is cancellable contractual
agreement made between a lessor
and a lessee
• Lessor responsibility of the
maintenace
•The assets is as a cost of profit and
loss account• Period: 2 to 3 year.(Less than working life
of the machine)
• For example: Computer equipment,
automobile and trucks.
Advantages
Pay for use the equipment only not ownership
Help achieve desired treatment or financial reporting purposes
Can return or purchase that equipment
Operating Lease or Service/ Maintenance Lease
Assets cost = RM50 000Lease Financing = RM50 000Lease Period = 3 YearsInterest Rate = 10% per assets and 12% residual value.Residual value = RM10 000
Monthly lease Payment:
RM50 000 + (RM50 000 X 10% X 3) + (RM10 000 X 12% X 3) / 36 = RM 1 905.56
Example of calculation:
3. Sale and Leaseback
It is arrangement involving one party/ seller a property to a
buyer and buyer immediately leases the property back to
the seller
Allow the buyer to make full use of the property while not having capital tied up in the
assets.
The owner of an assets sell it to another party
and immediately leases it back to use it for a
specified term
For Example: Buildings
Advantages
Sellers/user can control and have utility of the property in sale and leaseback
Sellers/ User can deduct from tax for the lease payments as expenses
Owner enjoys the potential of appreciation in the value of the property
Disadvantages
Tax maybe increase due owned for length period or book value is low than selling value
Loss of right to renovate the property
Users may lose right of retaining occupancy after end period of lease.
Sale and Leaseback
1. Description of Assets
2. Cost of Assets
3. Time of Period
4. Renewal option after end of period
5. Lease rent amount, frequency and payment mood
6. Option for termination (premature)
7. Terms of use the assets
Lease Agreement
Document which bonds the legal relationship between
Lessee and Lessor.
FACTORINGDEFINITION
Selling a/c receivables or debtors’ accounts (in terms
of invoices) to a factoring company
Method used by a firm to obtain cash when the available Cash Balance held by the firm is insufficient to meet current obligations.
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.
PROCESS OF FACTORING
Factoring company/factor
Factor’s customer/seller
Seller’s client/debtor
Import factoringMaturing with assignment of
equity
Maturity factoring Standard factoring
TYPES OF FACTORING
Advantages of Factoring
Protection against the default in
payment by AR/debtor
Maintenance of the receivables
a/c.
Improved cash flow & able to
take
advantage of trade discounts
Block DiscountingWhat is block discounting??
A credit facility for motor dealers, credit and leasing companies to augment their working capital by discounting blocks of hire purchase and leasing agreement receivables for present cash
•Improve funding •Better planning of cashflow•Attractive and competitive interest rates.•Flexible drawdown and utilisation up to approved limit•No commitment or renewal fees on unutilised portion from approved limit
Advantages
Motor vehicles
motorcycles
Consumer durables
Leased equipment
machinery
Financed goods
Real estate financing
Involves land & structures built upon the land
Can be classified as:
Residential properties
Agricultural land
Commercial properties
Industrial properties
Recreational properties
What is real estate?
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
Developer’s overall financial condition is assessed
• Financial strength• Experience • Responsibility & ability to
invest the required equity
Project is both the source of repayment & collateral for the loan