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