Access to funds for finance lease companies

There has been a sharp rise in the number of finance lease companies in China in the past couple of years and this has become an increasingly important aspect to the national economy and social development. However, unlocking access to funding is still a key hurdle to the growth of such companies in China. For these capital-intensive companies, getting relatively “cheap” capital is a top concern worthy of discussions.

A company may raise funds through either equity financing or debt financing. Equity financing may be enabled through, for example, a capital increase, an IPO, a backdoor listing, and going public on overseas exchanges, whereas debt financing is possible through bank loans, bank factoring, commercial factoring, note financing, leased asset securitization, trust loans, bond issues and so on. In this article, we will only discuss several most commonly used financing approaches.

Capital increasement. A share capital increase not only raises the net assets of a company, but also indirectly expands its business scale. Pursuant to the Measures for the Administration of Foreign-funded Lease Businesses (abolished), a finance lease company must restrict its risk assets to not more than 10 times its total net assets. In other words, a finance lease company is allowed to expand its business scale by nine dollars when its registered capital increases by one dollar. In practice, though there are many finance lease companies with registered capital amounting to hundreds of millions or even billions of dollars, constant share capital increases put funding pressure on their shareholders, who may find it difficult to reap cash returns on their investments.

Liu Zunsi is a partner at Merits & Tree Law Offices