1 MODERN FINANCE TECHNIQUES Arman BALÇIK Industrial Engineering Department Dokuz Eylül University

2 MODERN FINANCE TECHNIQUES As a result of the globalization financial system has changed. Modern Finance Techniques –which are leasing, factoring, forfaiting and franchising- help all the sectors in this new financial system. Manufactories –which are especially new- use these techniques to get huge profits without the huge investments. All the manufactories –new ones and old ones- use these techniques for fulfill their investments. These techniques are hard to understand without well knowledge about economy science. I’m trying to explain these techniques superficially.

There are four types of modern finance techniques; Leasing Factoring Forfaiting Franchising 3

LEASING Leasing is an effective investment method for companies, especially for those growing ones, through which they can provide medium and long term financing to fulfill their investments. In leasing, the equipment required by a firm is purchased by the leasing company and then leased to the firm, and at the end of the lease period, the title of the equipment is transferred to the firm. Therefore, leasing provides significant advantages to businesses in equipment purchases. 4

5 Simple explanation of leasing

6 Leasing has been used since 2000 B.C. People leased ships, fields, buildings and agricultural machines for years. Should you buy or lease your first wheel?

7 TYPES OF LEASING 1)Finance Leasing 2)Operating Leasing 3)Contract Hire

8 1)Finance Leasing A long-term lease over the expected life of the equipment, usually three years or more, after which you pay a nominal rent or can sell or scrap the equipment - the leasing company will not want it any more. The leasing company recovers the full cost of the equipment, plus charges, over the period of the lease. Although you don't own the equipment, you are responsible for maintaining and insuring it.

9 You must show the leased asset on your balance sheet as a capital item, or an item that has been bought by the company. Leases of over seven years, and in some cases over five years, are known as 'long-funding leases' under which you can claim capital allowances as if you had bought the asset outright.

10 2)Operating Leasing A good idea if you don't need the equipment for its entire working life. The leasing company will take the asset back at the end of the lease. The leasing company is responsible for maintenance and insurance. You don't have to show the asset on your balance sheet.

11 3)Contract Hire Often used for company vehicles. The leasing company takes some responsibility for management and maintenance, such as repairs and servicing. You don't have to show the asset on your balance sheet.

12 FACTORING Factoring - also known as 'debt factoring' - involves selling your invoices to a third party. In return they will process the invoices and allow you to draw funds against the money owed to your business. Essentially, these companies provide a finance, debt collection and ledger management service.

13 How factoring works Factoring provides a fast prepayment against your sales ledger. It allows you, at a cost, to flexibly increase your working capital and improve cash flow. Factoring is offered to businesses trading with other businesses on credit terms. It is not normally available to retailers or to cash traders.

14 Simple explanation of factoring

15 FORFAITING In trade finance, forfaiting involves the purchasing of receivables from exporters. The forfaiter takes on all risks involved with the receivables. It is different from the factoring operation in the sense that forfaiting is a transaction-based operation while factoring is a firm-based operation: In factoring, a firm sells all its receivables while in forfaiting, the firm sells one of its transactions.

16 Simple explanation of forfaiting

17 The characteristics of forfaiting transaction The characteristics of a forfaiting transaction are: Credit is extended to the exporter for a period ranging between 180 days to seven years. Minimum bill size is normally US$ 250,000, although $500,000 is preferred. The payment is normally receivable in any major convertible currency. A letter of credit or a guarantee is made by a bank, usually in the importer's country. The contract can be for either goods or for services.

FRANCHISING Franchising is the practice of using another firm's successful business model. For the franchisor, the franchise is an alternative to building 'chain stores' to distribute goods and avoid investment and liability over a chain. The franchisor's success is the success of the franchisees. The franchisee is said to have a greater incentive than a direct employee because he or she has a direct stake in the business. Fast food business is a good example for franchising. 18

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“Here’s your lemonade and here’s some descriptive literature about my franchising opportunities.” 21

22 Song Of This Presentation: “Money” by “Pink Floyd”!