UNIT 5 LEASING AND HIRE PURCHASE

Write a short note on consumer and housing finance?

Consumer finance is a lending scheme that enables customers to pay for products over time. It makes
cash flow predictable. This financing option helps to convert passive browsers into active buyers and
promotes customer loyalty.
Here are the ways consumer finance helps attain financial empowerment:
 Consumer finance allows you to make purchases you could not afford in the past. The availability
of reliable, quality, and affordable financial products helps you address varied financial obligations
and be financially empowered.
 Consumer finance can be offered by retailers or businesses to consumers using their funds or that
of a lending bank or company. It helps boost conversion rates and sales, which in turn helps
increase revenue.
 Consumer financing comes in handy to back unexpected expenses. If you need funds to fix your
broken-down appliance or car, a revolving credit helps you tide over the sudden expenses.
Moreover, with the availability of financing choices, you no longer have to carry substantial cash
while shopping.
 Additionally, you do not have to save for years to accumulate the cost of a purchase. Instead, you
can opt for payment plans to help you access the services or products.
Housing finance refers to the process of providing funds or financing for the purchase, construction, or
improvement of a home.
This can include mortgages, home equity loans, and other types of financing that are used to help
individuals and families purchase or improve a home. Housing finance can also refer to the industry that
provides these financial services, including banks, mortgage loan companies, and other financial
institutions.
HFCs were introduced to provide easy and affordable loan options. Here is their primary role:
 HFCs help in disbursing government-subsidised home loans to a particular community
 They offer easy credit facilities to housing boards that plan colonies near semi-urban or rural
settlements. A prominent example is satellite towns promoted by the government with the idea of
decongesting the habitat in the main city
 Rental discounting is another benefit offered by only HFCs. A rental discount is a way by which
real estate developers can get an easy home loan against rental receipts applicable to the property
 HFCs are different from nationalised or private banks since they offer home loans to those who are
unable to make down payments
What do you mean by venture capital? Explain its features, advantages and disadvantages?
Venture capital (VC) is a form of private equity funding that is generally provided to start-ups and
companies at the nascent stage. VC is often offered to firms that show significant growth potential and
revenue creation, thus generating potential high returns.
Financial venture capital can be offered by –
 Venture capital firms,
 Investment banks and other financial institutions,
 High net worth individuals (Angel investors), etc.
Venture capital firms create venture capital funds – a pool of money collected from other investors,
companies, or funds. These firms also invest from their own funds to show commitment to their clients.
Features of Venture Capital
Some of the features of venture capital are –
 Not for large-scale industries – VC is particularly offered to small and medium-sized businesses.
 Invests in high risk/high return businesses – Companies that are eligible for VC are usually
those that offer high return but also present a high risk.
 Offered to commercialise ideas – Those opting for VC usually seek investment to commercialise
their idea of a product or a service.
 Disinvestment to increase capital – Venture capital firms or other investors may disinvest in a
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company after it shows promising turnover. The disinvestment may be undertaken to infuse more
capital, not to generate profits.
 Long-term investment – VC is a long-term investment, where the returns can be realised after 5
to 10 years.
Advantages –
 Help gain business expertise
One of the primary advantages of venture capital is that it helps new entrepreneurs gather business
expertise. Those supplying VC have significant experience to help the owners in decision making,
especially human resource and financial management.
 Business owners do not have to repay
Entrepreneurs or business owners are not obligated to repay the invested sum. Even if the company fails,
it will not be liable for repayment.
 Helps in making valuable connections
Owing to their expertise and network, VC providers can help build connections for the business owners.
This can be of immense help in terms of marketing and promotion.
 Helps to raise additional capital
VC investors seek to infuse more capital into a company for increasing its valuation. To do that, they can
bring in other investors at later stages. In some cases, the additional rounds of funding in the future are
reserved by the investing entity itself.
 Aids in upgrading technology
VC can supply the necessary funding for small businesses to upgrade or integrate new technology, which
can assist them to remain competitive.
Disadvantages –
 Reduction of ownership stake
The primary disadvantage of VC is that entrepreneurs give up an ownership stake in their business. Many
a time, it may so happen that a company requires additional funding that is higher than the initial
estimates. In such situations, the owners may end up losing their majority stake in the company, and with
that, the power to make decisions.
 Give rise to a conflict of interest
Investors not only hold a controlling stake in a start-up but also a chair among the board members. As a
result, conflict of interest may arise between the owners and investors, which can hinder decision
making.
 Receiving approval can be time-consuming
VC investors will have to conduct due diligence and assess the feasibility of a start-up before going ahead
with the investment. This process can be time-consuming as it requires excessive market analysis and
financial forecasting, which can delay the funding.
 Availing VC can be challenging
Approaching a venture capital firm or investor can be challenging for those who have no network.
What do you mean by factoring?
Factoring is a financial service in which the business entity sells its bill receivables to a third party at a
discount in order to raise funds. Factoring involves the selling of all the accounts receivable to an outside
agency. Such an agency is called a factor.
Advantages of Factoring
The advantages of Factoring are:
1. Immediate Cash Flow: This sort of financing shortens the cash collection period. It facilitates quick
cash realisation by selling receivables to a factor. The availability of liquid cash can often be the factor
for grabbing and giving up an opportunity. The cash boost given by factoring is readily available
for capital expenditures, completing a new order, or meeting an unexpected condition.
2. Focus on Business Operations and Growth: By selling off invoices, business owners may relieve
themselves of the burden of collecting payments from customers. Receivables department resources can
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be focused on business operations, financial planning, and future growth.
3. Bad Debt Evasion: There are two sorts of factoring: with recourse and without recourse. In the case of
bad debts, the factor bears the loss without recourse factoring. As a result, once the seller sells its
receivables, it has no responsibility to the factor.
4. Quick Finance Arrangement: Factors provide funds more quickly than banks. Compared to other
financial institutions, factoring provides a faster application, less documentation, and faster settlement of
funds.
5. No Requirement for Security: The advances are made based on the strength of the receivables and
their creditworthiness. Factors, unlike cash credit and overdraft, do not require any collateral security to
be pledged or hypothecated. New enterprises and startups with significant receivables can readily qualify
for advances. Factoring, unlike typical bank loans, does not necessitate the use of your house or other
property as security.
6. Customer Analysis: Factors give significant guidance and insights to the seller on the credit quality of
the party from whom receivables are due. It helps in the negotiation of better terms between the parties
in futures contracts.
7. Time Savings: Factoring can save the firm time and effort that would otherwise be spent collecting
from consumers. That energy can be applied to other business-building tasks such as sales, marketing,
and customer development.
8. Cheap Source of Finance: It is a cheap source of finance than any other means such as banking.
9. No charge on Assets: It does not create any charge on the assets.
Disadvantages of Factoring
The disadvantages of Factoring are:
1. Expensive: This can be an expensive source of finance when the invoices are numerous and smaller in
amount.
2. Higher Interest Rate: The advance provided is generally available at a higher interest cost than the
usual rate.
3. Involvement of Third Party: The factor is the third party to the customer who may not feel
comfortable while dealing with it.
Differentiate between factoring and bill discounting?
Criteria Bill Discounting Factoring
Nature of Short-term financing against the Sale of accounts receivable or invoices to
Transaction discounted value of a bill of exchange or a third-party (factor) at a discount
promissory note
Parties Involves the drawer of the bill (seller), Involves the seller (client), the buyer
Involved the drawee (buyer), and a financing (debtor), and the factor (financing
institution company)
Financing Provides immediate cash flow by Provides immediate cash flow by selling
receiving a discounted value of the bill invoices or accounts receivable to the
from the financing institution factor
Ownership of The seller retains ownership of the bill The factor takes ownership of the
Receivables and is responsible for collecting payment accounts receivable and is responsible
from the buyer for collecting payment
Risk and The seller remains responsible for credit The factor assumes the risk of non-
Responsibility risk, collection, and credit control payment and is responsible for credit
control and collection
Invoice The financing institution generally The factor verifies the authenticity and
Verification verifies the authenticity and acceptance validity of the invoices
of the bill
Use of Collateral may or may not be required, Collateral may or may not be required,
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Collateral depending on the creditworthiness of the depending on the creditworthiness of
drawer and the buyer the invoices
Relationship The seller maintains a direct relationship The factor may establish a direct
with Buyer with the buyer, who is obligated to pay relationship with the buyer for payment
the bill collection
Confidentiality The transaction details are generally The factor may have direct contact with
kept confidential between the financing the buyer, and the transaction details
institution and the seller may not be confidential
Repayment The seller repays the financing The factor collects payment directly
institution after the buyer settles the bill from the buyer and deducts the amount
on its due date advanced to the seller
Examples Discounting a post-dated check, bill of Selling invoices to a factoring company
exchange, or promissory note with a for immediate cash flow and credit
bank management
Difference between Bank Guarantee and Letter of Credit (LOC)
Basis Bank Guarantee Letter of Credit (LOC)
Primary Makes sure that contractual Makes trade easier by offering a safe
Function obligations are met by working as a way to pay, making sure the seller
guarantee or assurance against default gets paid after meeting certain
or non-performance. conditions.
Payment Trigger The party for whom the promise is Payment is made as soon as the seller
given is responsible for paying if they presents papers that are in line with
don’t do what they agreed to do. the agreement; it is not dependent on
the buyer’s performance..
Applicability to This word is sometimes used in trade, Mostly used in foreign trade to make
Trade but it’s more often used for contracts, sure that you get paid when certain
bids, and performance guarantees. conditions are met, like delivering
goods and providing the necessary
paperwork.
Flexibility for Allows the recipient to choose, and can It gives the beneficiary less freedom
Beneficiary be used for many things, like bid because its main goal is to make sure
bonds, performance guarantees, and payment is made when the terms of
advance payment assurances. the deal are met.
Types and Various types, including bid bonds, Different types such as revocable and
Variations performance guarantees, advance irrevocable letters, standby letters,
payment guarantees, and financial and confirmed letters, tailored to
guarantees, each serving specific specific trade or payment scenarios.
purposes.
Difference between Forfaiting and Factoring
Basis Forfaiting Factoring
Definition Forfaiting is defined as a term where the Factoring is defined as a mechanism
exporter of the products or services sells its where businesses sell the receivables of
accounts receivables to a third party at a their accounts to a third party and in
discount in order to immediately receive the exchange receive an immediate advance
cash payment. on the amount.
Goods Goods involved in forfaiting are majorly Goods involved in factoring are mostly
capital goods such as machinery and other consumer goods and services.
equipment.
Type of Forfaiting mainly includes international Factoring mainly includes domestic
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Trade trade. trade.
Risk In forfaiting, the third party has to deal with In factoring, the seller has to deal with
all the risk. risk.
Time Forfaiting is used for long-term and Factoring is used for short-term account
period medium-term account receivables therefore receivables therefore credit period is of
credit period is of 3 months to 7 years. 90 to 150 days.
Cost In forfaiting, the third party has to bear the In factoring, the seller has to bear the
cost. cost.
Secondary In the forfaiting process, the receivables can In the factoring process, there is no
Market be sold in the secondary market. involvement with the secondary market.
Financing 100% finance can be provided in forfaiting. 80% to 90% of finance can be provided
in factoring.
What do you mean by credit rating? Explain the role of credit rating?
A credit rating is an evaluation of the creditworthiness of an individual, company, or government entity.
It is typically assigned by a credit rating agency based on an assessment of the entity’s ability to repay
debt obligations in a timely manner. Credit ratings are important because they provide investors, lenders,
and other stakeholders with an indication of the risk associated with lending money or investing in the
entity.
Importance of Credit Ratings
1. Risk Assessment: By giving investors and lenders a consistent way to quantify credit risk, credit
ratings enable them to estimate the probability of default and make well-informed lending or investment
choices.
2. Cost of Capital: Borrowers’ cost of capital is influenced by credit ratings. Higher rated organizations
may be able to borrow money at cheaper interest rates, which might cut their borrowing costs and boost
their profitability.
3. Market Access: Companies with stronger credit ratings may issue debt instruments more cheaply and
readily and have greater access to the capital markets. Growth and investment possibilities may be
facilitated by this access to cash.
4. Investor Confidence: By offering a third-party evaluation of creditworthiness, credit ratings
contribute to an increase in investor confidence. To assess the risk of possible investments, investors
might depend on the experience of rating organizations.
5. Regulatory Compliance: Credit ratings are often included by regulatory bodies into their regulatory
frameworks, necessitating that financial institutions take ratings into account when evaluating risk or
figuring out capital needs.
Write a short note on CRISIL?
CRISIL is a credit rating agency set up in India that provides ratings, analysis, risk, and policy advice
related to different types of investments. CRISIL not only assesses the creditworthiness of funds, but also
provides extensive research and insights into the performance, risks, and threats associated with any
funds or business.
Credit Rating Agencies assess the creditworthiness and perform extensive analysis of businesses, funds,
and even rates countries to provide the creditworthiness about them so that investors can utilise them to
make informed decisions. There are several credit agencies present in India, like,
 CRISIL (Credit Rating Information Services of India Limited)
 ICRA (Investment Information and Credit Rating Agency)
 CARE (Credit Analysis and Research Limited)
 India Ratings and Research Private Limited
Functions of CRISIL
1. Rating: CRISIL is the only rating agency in India that has a sectoral specialiSation. CRISIL ratings help
to assess creditworthiness and investment worthiness by investors and the public at large. CRISIL ratings
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are seen as a benchmark and a sign of trust and security.
2. Research: CRISIL provides research, analysis, and forecasts on the Indian economy, industries, and
companies to more than 500 Indian and international clients. CRISIL also partners with government
bodies to conduct research and conduct economic analyses which are useful for economic growth.
3. Mutual Fund Rating: CRISIL provides fund evaluation services and risk solutions to the big and
important mutual fund industry. CRISIL in 2014 started its function to assess mutual funds and since then
they have captured around 80% of the market.
4. Equity Research: CRISIL has added equity research to its wide domain of expertise, by acquiring
IREVNA which is a leading global equity research and analytics company. IREVNA offers investment
research services to the world’s leading investment banks and financial institutions which helps to
identify and analyse potential in equity.
5. Advisory: CRISIL also offers risk Solutions and risk management solutions, and also advice to Banks
and Corporates by leveraging the experience and skills of CRISIL in the areas of credit and market risk. It
provides policy advisory, regulatory, and transaction-level advice to governments and the public sector
for effective policy formulation.
6. Abide by the Regulatory Framework: CRISIL is regulated by SEBI (Security and Exchange Board of
India) which regulates all the credit agencies as well, SEBI establishes general guidelines that are to be
followed by all agencies in assessing any fund or company and CRISIL has to ensure that their clients are
following appropriate regulatory and legal framework. SEBI has a strict monitoring and regulation
process after some recent financial fiascos like IL&FS.
Basis Hire Purchasing Leasing
Meaning Hire Purchasing involves acquiring an Leasing involves renting an asset from
asset through a series of installment the owner (lessor) for a specified period
payments over a specified period. in exchange for periodic payments.
Ownership In hire purchasing, the buyer gets In leasing, the owner remains the same
Transfer ownership of the asset after completing throughout the lease period.
paying installments.
Payment With hire purchasing, the buyer pays In leasing, the lessee makes regular
Structure installments until they own the asset. payments to use the asset for a set time.
Maintenance In hire purchasing, the buyer is In leasing, the owner usually handles
and responsible for maintenance and maintenance and upkeep.
Insurance insurance.
Flexibility Hire purchasing terms are often fixed Leasing is more flexible; lessees can often
once agreed upon, offering less change terms or upgrade assets.
flexibility.
Tax Interest portion of hire purchase Lease payments may be treated as
Treatment payments may be eligible for tax operating expenses and deducted from
deductions as a business expense. taxable income.
End of Term With hire purchasing, ownership is Leasing allows options like buying,
Options gained, and no more payments are returning, or renewing the lease at the
needed. end.
Risk In hire purchasing, the buyer takes on In leasing, the owner retains ownership
Exposure the risk of asset depreciation or and risk.
damage.