FINANCIAL LEASING, FACTORING AND FINANCE COMPANIES

Prof.Dr.Huriye Kubilay

LEGISLATION

• Act on Financial Leasing, Factoring and Finance companies

Number of the Act: 6361Acceptance Date: 21.11.2012Official Gazette: 13.12.2012, Nu. 28496

• Regulation on Incorporation and Activity Principles of Financial Leasing, Factoring and Financing Companies, OG 24.04.2013, 28627

Financial Leasing Contract

Financial Leasing

• A Finance Leasing is a lease that is primarily a method of raising finance to pay for assets, rather than a genuine rental.

DefinationsLessor: The owner of an asset that is leased under an agreement

to the lessee. The lessee makes one-time or periodic payments to the lessor in return for the use of the asset.

Lessee: The person renting property under a written lease from the owner (lessor).

LESSOR

• Participation banks• Development and investment banks• Financial Leasing Companies

Financial Leasing Contract

• A Financial Leasing Contract is an agreement where the lessor receives lease payments to cover its ownership costs. The lessee is responsible for maintenance, insurance, and taxes.

• An Operating Lease on the other hand, is a lease where the lessor retains ownership of the asset. This means that the risk and rewards of ownership has not been transferred to the lessee.

Financial Leasing

Provides• To assign title of property to lessee at the end of

leasing period,• To grant a purchase right with less than current

market price• Whether the period of leasing must cover more than

80% of economic life of goods or the current total value of rental payments, which will be made according to financial leasing contract, must consist of a bigger value than 90% of current price of the goods.

Financial Leasing Contract

It is a commercial arrangement where:

• the lessee (customer or borrower) will select an asset (equipment, vehicle, software);

• the lessor (finance company) will purchase that asset;• the lessee will have use of that asset during the lease;• the lessee will pay a series of rentals or installments

for the use of that asset;

Financial Leasing Contract

• the lessor will recover a large part or all of the cost of the asset plus earn interest from the rentals paid by the lessee;

• the lessee has the option to acquire ownership of the asset (e.g. paying the last rental, or bargain option purchase price);

The finance company is the legal owner of the asset during duration of the lease.

However the lessee has control over the asset providing them the benefits and risks of (economic) ownership.

Financial Leasing Contract

Advantages

• It offers fixed rate financing. As the costs go up over five years, you still pay the same rate as when you began the lease.

• There is less upfront cash outlay; you do not need to make large cash payments for the purchase of needed equipment.

• Leasing better utilizes equipment; you lease and pay for equipment only for the time you need it.

• You can keep upgrading; as new equipment becomes available you can upgrade to the latest models each time your lease ends.

• it is easier to obtain lease financing than loans from commercial lenders.• It offers potential tax benefits depending on how the lease is structured.

Financial Leasing Contract

Disadvantages

• You have an obligation to continue making payments. Typically, leases may not be terminated before the original term is completed.

• You have no equity until you decide to purchase the equipment at the end of the lease term, at which point the equipment has depreciated significantly.

• Although you are not the owner, you are still responsible for maintaining the equipment as specified by the terms of the lease.

Association of Financial Leasing, Factoring and Finance Companies

• Financial leasing Companies (31)• Factoring Companies (78)• Finance Companies (13)• Financial Holding/Group Companies (3)

Association of Financial Leasing, Factoring and Finance Companies

• It is a professional public institution which has legal entity.

Establishment requirements

• Establishing as joint stock corporation and the number of founders cannot be less than five.

• Share certificates must be issued in cash and to a specific person.

• Commercial firm name must include one of terms; «Financial Leasing Company», «Factoring Company» or «Finance Company»

• Founders must have all requirements included this Act.

• Members of Board of Directors must have professional experience which is regulated by corporate governance provisions of this Act.

• Minimum paid capital is 20 million TL• Articles of association complying with the

provisions of this Act• Having transparent and clear corporate body

which will not prevent efficient control of Banking Regulation and Supervision Agency

• Submission of working plans, projects related to financial body of the corporation, budget plan for first three years and activity programme which presents structural organisation of the corporation.

PERMISSIONS FOR ESTABLISHMENT AND OPERATION

• Permission for establishment from Banking Regulation and Supervision Board (BDDK)

• Permission for operation from Banking Regulation and Supervision Board (BDDK)

BRANCHES

• Companies are allowed to open branch in Turkey or abroad. Companies cannot make agency contracts.

RESTRICTED ACTIVITIES

• Works and transactions which companies cannot execute are enumerated in the Act (Art.9).

• Companies can work as intermediary for defined insurance contracts.

ACQUIRING AND ASSIGNING OF SHARES

• Some transactions related to acquiring and assigning of shares are depended on permission of BDDK.

MERGER, TRANSFER, DIVISION, DISSOLUTION/WINDING UP

• BDDK defines the procedure and principles related to permission in case of merger, transfer, division and dissolution.

BOARD of DIRECTORS

• BoD, cannot consist of less than three persons included general manager.

• General manager must have min. 7 years professional experience and deputy general manager must have min. 5 years professional experience besides undergraduate level education.

Financial Leasing Contract

Law on Financial Leasing

• The Law no. 6361 on Financial Leasing regulating Financial Leasing operations

• Leasing contracts gives the Lessee the possession of the Good in order to provide the full benefit for an irrevocable time period against payment of the Rental Amount.

• Subject of a Contract may be movable or immovable Goods.• Ownership of the Goods subject to leasing shall remain with

the Lessor . Intellectual and ındustrial rights like patents cannot be subject to this Contract.

Financial Leasing ContractLegal Aspects of Leasing Contracts

• The Lessee shall be the user of the Goods during the leasing period and shall have all benefits of the Goods,

• The Lessee shall be responsible for the loss or damage to the good,• The Lessee may not transfer his possession rights to a

third party. • The Lessee shall pay the insurance premiums for an

indemnity insurance.

Financial Leasing ContractOther Laws Governing Leasing Contracts

• In the absence of a specific provision under this Law, leasing contracts will be governed by the general provisions if appropriate, private provisions as much as applicable, of the Law of Obligations.

• Articles 688,689,690 of the Civil Code, Articles 222,223,224 and 254 of the Law of Obligations and the provisions of the Law no.6570 governing Real Estate Rentals shall not be applicable to the Contract.

• The Contract is exempted from all types of taxes, duties and charges according to Turkish Law of Tax.

Financial Leasing Contract

International Accounting Standards (IAS 17)

• IAS 17 prescribes, for lessees and lessors, the accounting policies and disclosure to apply to leases.

• According to the Standart; A lease is classified as a finance lease if it transfers substantially all the risks and rewards incident to ownership.

• All other leases are classified as operating leases.

FACTORING CONTRACT

• Factoring contract is a financial transaction whereby a business sells its accounts receivable (invoices) to a third party (called a «factor») at a discount.

• THE SELLER THE FACTOR• THE DEBTOR• This Contract must be made in written form

(Validity requirement)

FINANCING CONTRACT

• Financing contract is a contract which financing company gives credit by making direct payment to the seller with delivery or providing goods or services for the name and on account of a real person or legal entity who purchases goods or services (direct representation).

• This contract must be made in written form (Validity requirement).

CENTRAL INVOICE REGISTRATION

• Factoring companies and banks centralizes knowledge related to receivables which they have assigned, included invoices information at Risk Center or in a manner approved by the Association.

CRIMES

• Operation without permission• Decleration against reality• Withholding information and document,

claimed by duly authority and controlling officers or preventing performance of their duties.

SANCTIONS

• Administrative fines• Punitive fine• Prison sentence

CANCELATION OF PERMISSION FOR OPERATION

• Non-starting activities within one year consecutive the date of permission for operation.

• Non- becoming member of the Association within one month from the date of receiving permission for operation or non-performance of this duty within one week from the date of warning by the BRSA (BDDK).

• Non-decleration new address and non-presence in spite of legal notification

• Having a break for one year without interruption

• Performing restrictive activities• Termination of the activity.