Private and confidential
LEASING/ASSET FINANCE TRAINING FOR ULA
Prepared for Uganda Leasing Association
Denis Owili
16/06/15
Contents
1
BASICS OF LEASING/ASSET FINANCE
•
What is Asset Finance
.
Is asset Finance Leasing
.
Types of Leases
.
Benefits of Leasing
•
Stakeholders for any given Lease
•
•
Assets that can be leased
Industry Practice in Uganda
What is Asset Finance
Key points

Asset finance is a sustainable form of funding that can enable a business to purchase or refinance capital
equipment such as commercial vehicles, print machinery or construction and plant, spreading the cost over an
agreed period of time.
purchase./refinance
equipment

Demonstrating its power as a strategic tool for business growth, asset finance is now the fastest growing
finance option on the market.
Strategic tool for
business growth

The assets must meet the following Criteria
Sustainable form of
funding
 identifiable by means of serial numbers, engine number, make, and model
 acceptable in terms of risk, value, condition and use of the asset
 obtainable by the bank, in a valid and unassailable legal title
 unencumbered (that is free and clear of any other claims or prior liens)
 purchased from a reputable dealer/supplier
 moveable, tangible and be able to be repossessed
 fully insurable.
 Marketable or saleable
-
easy to value and its market value must not be subject to wide fluctuations
-
verifiable in terms of the ownership of the asset
2
Is Asset Finance Leasing?
Key points
Explanatory Notes on each type of Asset Finance
Types of Asset Finance
Key points
Key points
3

Hire Purchase

Sale & Lease Back

Finance Lease

Operating Lease

Hire Purchase product provides the flexibility to spread the cost of an asset
over a fixed period. Hire Purchase offers you fixed monthly repayments so
you can manage your budget effectively over the repayment term. Plus, when
the repayment term is finished, you own the asset.

Sale and Lease Back is an innovative product that enables you to unlock the
capital held in your existing assets. It is a simple yet effective way to finance
a business that is aiming for expansion.

If a business wants to maximize the use of an equipment without the
responsibility of owning it, a Finance Lease will give them the freedom and
flexibility they need. Also referred to as a full-payout lease, it seeks to recover
the full cost of the asset, along with interest, over the primary agreement
term. The business will have full use of the asset for its useful life, being
responsible for its maintenance and insurance.

For a flexible way to enjoy an asset, Operating Lease is a great solution. It
allows the business full use without the burden of ownership. The lease
period is for a fraction of the asset’s useful life, which means you only pay for
the difference between the original purchase price and the residual value at
the end of the agreement.

At the end of the lease term, the asset is returned tp the Lessor and are
responsible for disposing of the asset along with recovering the residual value
on which the agreement was based.
Key points
Types of Leases
What is Leasing?

Leasing in its simplest form is a means of providing access to finance and may be defined thus:
‘a contract between two parties whereby one party (the lessor) provides an asset to another party (the lessee)
for usage and possession for a specified period of time, in return for specified and agreed payments.’
4
5
Two types of Leasing
1. Financial Leasing
2. Operating Leasing
What is Leasing?......................
6

Its Medium term financing typically 2-5 years

Is Asset based financing

Is an additional source of financing especially to SME’s
Leasing Contract
asset
customer
7
What is financial Leasing?
LESSOR
(Leasing company)
Pays the invoice from the
equipment/vehicle
Supplier
Legal ownership
of the asset
(until the end of the lease)
LESSEE
(Customer)
Use of the asset
Possession of the asset
Fiscal benefits
associated with the asset
8
Financial Leasing Process
Supplier
Lessee (client)
Lessor (Bank)
Benefits of Leasing

There are tax benefits for Companies to finance their capital goods through Lease options. These are mainly manifested in the
Operating lease scenarios. ROA improves,

The asset value is taken into consideration when assessing the collateral position of the client. This is an incentive to clients
whose collateral value may not be adequate.

VAF forms a good lock in for clients and ensures loyalty to the bank. It’s a penetration product

The product provides for flexibility in terms of repayment structuring allowing for purchase, installation and commissioning of
the equipment.

Preserves Existing Credit Lines
VAF gives our client a new source of credit for present and future needs, while existing bank lines remain intact for other uses.

The value of equipment is realized when using it than when owning it.
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Rights and Duties of Lessors and Lessees
The lessor pays the supplier for the equipment (or vehicle)
The lessor becomes the legal owner of the asset
The supplier delivers the asset to the lessee
The lessee has to agree to accept the asset
The lessor’s main duty is now complete
The lessee must make all the repayments to the lessor on time
If the lessee does this then s/he will enjoy uninterrupted use
and possession of the asset
The supplier may give a warranty on the equipment (or vehicle)
The lessee benefits from this warranty
The lessee contacts the supplier directly if there any problems
The lessee is responsible for the maintenance of the equipment
The lessee pays for the servicing and maintenance
10
Rights and Duties of Lessors and Lessees……………….
The lessee must insure the asset for the whole duration of the lease
Any damage caused to the asset must be remedied at the sole cost of the lessee (or insurer)
The lessee must allow reasonable access to the equipment if the lessor requests
The lessee cannot pass or sell its obligations or rights to a third party
The lessor may transfer the lease contract to another party
BUT
The lessor may not sell (or pledge) the asset, only the lease contract
The new “lessor” must respect the terms and conditions of the lease contract
11
Stakeholders for any given Lease
• Customers : Both Internal & External Customers
• Government
• Other internal departments such as IT, Risk, HR, Finance, Credit
• Vendors
Why are these stakeholders important in any given lease transaction?
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Types of assets
•
Office equipment
•
Machinery and equipment
•
Earthmoving equipment
•
Commercial vehicles / Public transport
•
Aviation
•
Shipping and commercial fishing
•
Medical equipment
•
Agricultural equipment
•
Yachts and motor boats
•
Motor vehicles
Office equipment
Considerations
•
What type of equipment is to be financed?
•
Will the equipment be used in the generation of business’ income?
•
What will this equipment be used for and how will it support the business?
•
Are there any other costs involved for aspects like installation and maintenance?
Machinery and equipment
Considerations
•
Long term contracts or short variable jobbing contracts?
•
Is purchasing adding value to the business?
•
Luxury purchase or productive asset base?
•
Generate sales or considered as an expense?
•
Reputable supplier providing service back-up?
•
Impact on production capacity
•
Demand for goods and services
•
Established market or not?
Earthmoving equipment
Considerations
•
Core business?
•
Composition of the fleet?
•
Contracts on hand?
•
Where is machine going to operate?
•
Perform physical inspection
•
Contract incoming funds period should match period of financing
Commercial vehicles/Public transport
Considerations
•
Core business
•
Type of goods
•
Total distance to be travelled
•
Length of hauls
•
Condition of roads to be travelled
Commercial vehicles/Public transport
Considerations
•
Maintenance of equipment
•
Contract price per kilometer
•
Composition of fleet
•
Fleet insurance
•
Management experience
Commercial vehicles/Public transport
Considerations
•
Permits held
•
High risk areas:
•
Maintenance contracts
•
Back-and-forth hauling
•
Fleet purchased from borrowed money
•
Contracts purchased from transport broker
•
Taxi’s
•
Age of vehicle to be purchased
Aircrafts
Considerations
•
Service and spares back-up
•
Certificates of airworthiness
•
Service record
•
Registration number
•
Age vs. contract period
Aircrafts
Considerations
•
Insurance
•
Owner of asset must be financed under loan structure
•
Verification by Department of Civil Aviation
•
Engine hours
•
Frame hours
Shipping/fishing
Considerations
•
Nautical consultant must evaluate vessel
•
Marine mortgage
Agricultural equipment
Considerations
•
What does farmer need goods for?
•
Monthly repayments of non-productive and/or luxury goods
•
Substantial upfront payment
•
Payment frequency
Used assets
Considerations
•
Stage of asset life cycle
•
Cost of maintenance of used vs. new assets
•
Older assets break down more often
•
Effect on customer’s cash flow
•
Parts availability
•
Life span
Used assets
Considerations
•
Condition
•
Valuations from reputable valuator
•
No finance higher than market value
•
Must be insurable
•
Establish ownership
Industry Practice in Uganda

The Leasing Industry is currently not operating under any specific Leasing Law. Its is working with a Cock tail of laws including
the Companies act, Income Tax Act, VAT Act
•
The Industry is characterized by many different players. Currently known institutions financing assets are about 8 commercial
Banks and other independent leasing institutions.
•
Banks are offering a cocktail of structures ranging from leases as well as term loans.
•
There is no statistics to verify the size of the leasing market and this is because the different players are not willing to share
their data
•
Most of the institutions still offer balance sheet lending for finance leases as opposed to Cash flow lending which is the core of
lease analysis.
•
The banks offering lease transactions require the lessees to put an initial capital outlay ranging typically from 10% to about
35% of the equipment cost
•
Lease repayments are structured over a 3 year period but to some extent range to about 5 years.
•
Lessors have maintained good relationships with suppliers because this has proved to be a good source of business.
•
There is a drive to tap into the Government leasing programmes. ULA has started sounding the drums and we hope that Gov’t
will take the heed.
•
The Courts of law are still “green” in the areas of leasing and so there is a need to fast track the leasing law so that the
boundaries between Lessees and Lessors are well defined.
Industry Practice in Uganda................
•
The repossession process is hitherto ad hoc. Most lessor’s take advantage of Court bailiffs, police and internal staff.
•
The Lessee’s are often misinformed of their rights and obligations. This should clear once the leasing law is enacted into force.
•
There are few skilled staff knowledgeable in the leasing business. Banks have began embracing lease training to up skill their
staff.
•
The equipment and car industry is characterized by OEM’ representatives. Hence major equipment suppliers are agents of
the OEM’s
There is a dominance of used vehicles in the market. i.e. Total industry sales for new cars is approx. 2,000 vehicles whilst
used cars is 50,000 cars. So where do you play in?
•