Exploring the comparative advantage of finance lease over suppliers’ credit: the case of Tractor & Equipment Ghana Limited

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Capital equipment acquisition takes careful planning and substantial investment of both resources in time and money. Due to the high capital outlay involved in purchasing such equipment most buyers, depend on various sources to finance such acquisition. Some of such sources are: local bank loans, external bank loans, facilities from external sources e.g. Japanese non-project grant aid, U.K government, etc. other sources include client financing and supplier’s credit as well as leasing of the equipment. The most common mode of equipment acquisition is through direct suppliers’ credit. The process of granting credit to customers is not very well structured in most companies in Ghana. Sales managers hurriedly recommend credit facilities to prospective buyers in an attempt to increase sales turnover without much due diligence, which sometimes leads to bad debts. Many capital equipment dealers in Ghana have suffered huge losses as a result of complete non-payment and sometimes exchange losses due to delay in payment. The study therefore sets out to explore the comparative advantage of finance leasing to Tractor & Equipment Ghana Limited. It also continues to ascertain reasons for the inability of customers of Tractor & Equipment in honoring their credit installment payments. Level of awareness of finance leasing was also examined within the construction industry. To realize this goal, hundred customers of Tractor & Equipment from the construction industry were sampled to give meaning to the objective of the study. The customers were selected from members of the Association of Road Contractors (ASROC), Ghana Real Estate Development Association (GREDA) and Ghana Chamber of Mines. In addition Chief Executive Officers of three leasing companies namely, Ghana Leasing Co. Ltd, Lease Afric Co. Ltd and General Leasing Co. Ltd were interviewed to extract relevant information for the study. Analyzing the data generated from the sample, which has 95% confidence level, interesting findings were made. The study established that delayed payment of contract certificates by the Government as well as limited period of credit offered by Tractor & Equipment were the reasons for the customers inability to fulfill their credit installment schedules. It also came to light from the analysis that 45% of the customers in the construction industry have no knowledge of leasing. The study further revealed that profitability with finance leasing is more than that of the credit policy being operated by Tractor and Equipment Ghana Limited. To improve on the level of awareness of finance leasing in the construction industry, Tractor and Equipment in collaboration with the leasing companies should organize workshops to sensitize member of the construction industry on the significant role leasing play in the acquisition of capital equipment for national development. Furthermore, for Tractor & Equipment to improve on the sale of equipment and also reduce the high indebtedness of its customers to their operations, they should as a matter of fact look at establishing and in-house finance leasing outfit to prevent the company from going insolvent.
A thesis presented to the Board of School of Graduate Studies, in partial fulfilment of the requirements for the award of Master of Business Administration degree, 2004