Equipment Leasing

Types of Leases

The Capital or Finance Lease: If long-term ownership of the equipment is your goal, a capital lease might be your best choice. It would be categorized on your balance sheet just like a bank loan, with deductible interest expense on your income statement. But, at the end of your lease, you can purchase the equipment for a nominal sum. Most purchase options range from $1 to 10% of equipment cost. With this type of agreement, the service provided by the lessor to the lessee is limited to financing equipment. All other responsibilities related to the possession of equipment, such as maintenance, insurance, and taxes are borne by the lessee. A finance lease is one that does not qualify as a True Lease (for tax purposes) or an Operating Lease as defined by FASB 13 accounting standards.

Master Lease: An agreement that defines the governing terms of subsequent schedules between the lessor and the lessee. It allows the lessee to add additional equipment at future dates utilizing independent payment and equipment schedules. This type of agreement is an excellent tool for clients that foresee a period in which they will be adding equipment over an extended period of time to their business. Manufacturing facilities that are updating their production capabilities are perfect examples of where a Master Lease is a great solution. The Master Lease would allow the business to obtain one credit approval and as equipment is delivered over a period of time, different schedules would be used to book the transaction but all schedules would be governed by the terms of the Master Lease Agreement.





True/Operating Lease: Leases that meet the definition for an off balance sheet transaction as defined by FASB 13. Generally, these agreements are preferred when the lessee has no intention of owning the equipment at the end of the rental term. The lessee can use the equipment for a small percentage of the actual useful life of the asset.

Sale Leaseback: An agreement where the Lessor agrees to purchase equipment from the Lessee who currently owns the equipment and then agrees to lease the equipment back to the Lessee. Generally, we see request like this when a company has used their cash to purchase equipment and then they find themselves needing cash for operations. Since establishing clear ownership can be difficult at times, we have found that if the credit criteria can be met, Working Capital Loans may be a better solution for the customer.





Start Up Lease: When prospects call us and explain that they are new in business, the first thing we do is congratulate them for taking advantage of the American dream. Our next goal is to have an honest conversation where we try to explain that our underwriters loan money based on past performance, they invest their money based on the prospects of future performance. What is the difference? In most cases, investment in the future of an unproven business contains much more risk to the underwriter. If we can document items that will help remove risk, such as experience in the industry, financial stability, and home ownership, in some cases, this can help our ability to obtain more preferential pricing from our underwriters. The bottom line is that until we are able to show our underwriters that your business has staying power, expect underwriters to make decisions based on investment criteria they have established rather than lease or loan criteria.   





Municipal Lease: A lease used by State and local governments to obtain equipment. The Muni lease is a much easier form of financing government needs than offering Municipal bonds in most cases. In most cases, the governing entity will retain ownership of the equipment that has been leased. The terms of these leases can range from one year and longer and the limit to the size of the transaction is only limited by the rules of the municipality and the underwriter. Chances are, the next time you pass a fire truck, ambulance, or police car, you have seen a Municipal lease in action. 





Government Leases: The Federal Government has realized the benefits of utilizing leases to obtain the equipment they need just as State and Local governments have. Often a need is present for equipment but the limitations of the operating budget keep managers from making the purchase. With a Government Lease, the manager can expense the lease payments over time from that same operating budget while obtaining the equipment for immediate use.

Lease Purchase Options

One Dollar Purchase Option: Permits purchase of the equipment at the end of the original lease term for $1.00. This purchase option is the most common choice we see for most leases we write in the small ticket arena. (Under 50k)

10% Purchase Option: Permits the lessee to purchase the equipment at the end of the original lease term for a fixed and guaranteed amount of 10% of the original equipment cost.

FMV (Fair Market Value): Permits purchase of the equipment at the end of the original lease term for its then fair market value. FMV is determined at lease expiration by recognized appraisers or similar experts in the specific equipment.

10% PUT: Requires the lessee to purchase the equipment at the end of the original lease term for a fixed 10% of the original equipment cost. 






Special Terms

Deferred Payments: This option allows the lessee to defer their first payment up to 90 days from the start date of the agreement. Lessees find these deferred payments of great benefit in cases where it may take a short period of time before the economic benefits of the newly acquired equipment are felt in the bottom line. Example: A 60 month lease may be considered a 63 month lease with the first three payments being of nominal value.

Seasonal/Skip Payments: This structure permits payment reductions or abatements during a seasonal business' slow period. Seasonal businesses can then match their lease payments to the times of year that a business generates its income. Often this type of lease will allow the Lessee to skip any one lease payment a year. This is an excellent option for seasonal businesses such as landscaping companies.

Step Payments: Some Step-Leases call for lower payments early in the Lease term and higher payments later on. Businesses acquiring more costly or higher capacity equipment than currently needed, but who will require greater productivity in the future, find this plan attractive. Rather than installing a smaller unit today, and then having to soon upgrade or replace the equipment, reduced front-end lease payments can permit the acquisition of higher capacity equipment at the Lease outset. Conversely, Step-Down leases can permit a faster write-off of leased equipment that will be obsolete in a short period of time. This structure matches the higher front-end leasing payments to the highest productivity stage of equipment usage.