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STRATEGIES TO OVERCOME COMMON OBJECTIONS IN LEASING

It is important for the lessor (owner of asset) to identify objections that may come your way as you prospect for business. Some of the most common objections include: Leasing is more expensive The entity wants to acquire through cash Leasing is complex The entity believes in ownership Non cancelable leases are a concern The entity is seeking tax benefits The following suggestions could help in addressing the concerns of the lessee Leasing is more expensive; assuming purchase is…

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INGREDIENTS OF RISK MITIGATION IN LEASING III

Complexity is the degree of sophistication of the asset in terms of engineering design specification, which the lessee must aver to in writing to the lessor that it is operationally appropriate for its business. This reduces the risk of downtimes and the ability to yield revenue targets needed for servicing the lease rentals. In addition, the more technologically complex the asset is, the greater is the need for the lessor to insist on protective mechanism of its interest. Currency…

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INGREDIENTS OF RISK MITIGATION IN LEASING II

Capacity is the ability of the lessee to honour his financial obligations to the lessor and other creditors as determined by the assessed viability of the business or intended use of the lease facility. This can be done by appraising the profits which are the main source of funds for servicing the lease rentals payments. Profits should be growing at an increasing rate or at least remain stable over time. The fixed charge coverage ratio is expressed as: Earnings…

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INGREDIENTS OF RISK MITIGATION IN LEASING

In any venture, the question of risk cannot be overlooked in the sense that the investor is taking the chance that the investment might not eventually yield the desired return or the actual cash flow might fall below expectation. Hence, in every investment particularly leasing, risk must be analysed. Risk may be defined here as the possibility that an expected stream of earnings or cash flows may have associated with it, the undesired chance of non-attainment. This non-attainment often…

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HOW TO REDUCE WASTAGE ON RESIDUALS

Residual value analysis is a comprehensive process aimed at determining the future value of equipment at specified times during the lease term and at expiration. The issue of residual value is very crucial in leasing. In operating lease for example, the lessor is more likely to rely upon the future value of the leased asset for its profit as the lessee’s ability to pay the lease rental. However, care must be taken in assessing the residual value. For instance,…

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HOW TO ARRIVE AT LESSOR’S INTERNAL RATE OF RETURN (IRR)

As a lessor (owner of asset), you have two objectives in arriving at IRR (interest rate) for lease: to be competitive and ensure adequate return to cover all cost and satisfy shareholders. To be competitive, you must always keep abreast of market rates and then attempt to stay within that range. There are two approaches to ensuring adequate return. The first which is commonly used is to take the average cost of debt, add the needed spread to stay…

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VARIOUS ASSETS THAT YOU CAN LEASE

As a lessee, it is important to understand that leasing can help you acquire any type of asset you desire. Any asset, cutting across the various sectors of the economy can be gotten through leasing. Whether you desire assets for business or comfort can be acquired through leasing with ease, convenience and flexible payment pattern. See some various aspects: ¨ Transportation equipment including vehicles, trucks, tractors, heavy duty vehicles, Garbage trucks, Tankers, Trailers, Buses etc ¨ Agriculture equipment including Ploughing machine,…

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UNDERSTAND YOUR RISKS BETTER (PART II)

The assessment of the various risks confronted by a lessor (owner of an asset) continues with these: ADDITIONAL RISK ELEMENTS Several other risks may impact the credit decision but may not be apparent at the time of initial risk assessment. These risks are equally important and need to be fully considered. i. Funding Funding mismatch is a major risk that may affect the lessor’s operation. A lease may be financed on a fixed or variable rate basis. It is…

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UNDERSTAND YOUR RISKS BETTER (PART 1)

In leasing, lessors (owner of an asset) are faced with two major types of risks: credit and asset risks. Before you as lessors commit into any lease transaction, it is imperative to conduct a proper analysis of the lessee (user of an asset) on these two types of risk. Lessor. having assessed the credit worthiness of the lessee, it is equally imperative to assess the other risks, which may confront the lessor. These include: (1)       OWNERSHIP RISK The lessor…

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TIPS ON RESIDUAL VALUATION

In leasing, a key activity that must not be taken lightly is how to value your residuals. (Residual value is the value of the leased asset at the end of the lease transaction). Residual value analysis is a comprehensive process aimed at determining the future value of equipment at specified times during the lease term and at expiration. The issue of residual value is very crucial in leasing. In operating lease (this is lease whose intention is not to…

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