1. Negotiation simulation:

Work out your hidden agenda according to the importance of the issues. Make decision on what interests you will defend and where you can make concession. You can compare leasing with having bank loans, considering such factors as bank interest rate, service fee, tax rate paid and leasing interest rate. Try to reach an agreement on the major issues satisfying both sides most important interests.

Here is the background:

Financial Leasing Negotiation

1. Introduction

Sanfeng Group in Lin County is a manufacturer of machine tools reaching a relatively large scale. For purpose of winning market competition, the group has decided to replace the obsolete equipment with new ones including hard and soft equipment of special machine tools, IT system and network. The calculation of the investment reveals that the renewal amounts to 1,200 million Yuan. If the group makes the payment with its own fund, it will be a heavy burden for the group, although the restoration means a remarkable improvement of efficiency and great future of the group. The alternative of the group is to apply for bank loans because it keeps a good credit record. The option of doing the renewal using either its own fund or bank loans has a few problems: firstly, the group may have to pay high tax rate because the legal depreciation of the equipment is 15 years; secondly, the borrowing would increase the ratio of liabilities of the group, which is detrimental to its corporate bond issuing; and thirdly, the fluctuation of cash flow is also challenging because the equipment supplier demands for the full payment within 18 months, and 60% of payment should be made in first three months. The management faces the great challenge of high cash payment in the initial period and managing financial stability.

The management of the group following a specialist's suggestion gets in touch with the Sunshine Financial Leasing Company (SFLC) and is informed that its investment problem can be addressed through financial leasing. Financial leasing is an alternative way of raising fund, in which a lesser, according to the requirement of a lessee, signs a purchasing contract with a supplier, as well as a leasing contract with the lessee. The lesser promises the lessee the right of using the equipment under the condition that the latter pays the rent. The lessee, upon making full payment of the rent on expiring date, gains the ownership of the equipment. Obviously, the payment structure of rent in international leasing business is important for the lesser and the lessee. There are different ways to calculate rent, and the most common one is called "equal sharing" approach. Generally speaking, the rent consists of original price of equipment, leasing interest rate, profit, service fee, estimated nominal price of the equipment, etc.

The equation is shown as the following: each payment=

(Original price+ freight + Insurance- remaining value)+ Interest +profit +service fee

Total times of payment

The length of the leasing period depends on the life of the equipment, for instance equipment of low value is within 3 years; plants, machinery equipment, computers and the like are about 5 years; aircraft, ship and railway stocks are about 10 years. Normally, the length of leasing period is counted as 75% of equipment life.

2. Agreement Reached and Remaining Issues

After the first round of negotiation, SFLC agrees to pay all the expenditure of the equipment and software at one time and lease them to the group. On the expiry date, the ownership is transferred to the Sanfeng Group. In the following negotiation, both sides will talk about way of rent payment, service fee (one shot payment), leasing interest rate (according to purchasing price of equipment), expiry date and date of rent payment.