LeasingNotes.com

Types of Equipment Lease Financing

Although lessors may have different names for them, you’ll find that there are basically two types of equipment lease financing: finance and true.

What is a finance lease? Finance leases are also known as capital leases, conditional sales, or dollar buy out leases. These leases are mainly for businesses that wish to keep the leased equipment at the end of the lease. The advantage to the lessor in this case is it gives them the option to purchase the equipment for a small fee, usually $1.00. This works for the lessor because payment terms on finance leases tend to last close to the expected useful life of the equipment and the payments themselves then to be higher.

What is a true lease? True leases, also called tax leases, operating leases, or FMV (fair market value) leases, do not usually span the full expected life of the equipment. At the end of the lease, you can choose to walk away from the equipment or purchase it at fair market value. Payments on true leases are generally lower than payments on finance leases and this is because lessors have the opportunity to resell the equipment when the lease ends. This option works best for lessees that may want to upgrade their equipment by the end of the lease.

Business equipment leasing has become an increasingly popular financing option for Canadian companies that need new equipment.

Tax implications

One of the main benefits of true leases is that you may be able to fully claim all lease payments as tax deductible expenditures. Although finance leases let you spread your payments over time, they are not tax advantaged in the way true leases are. Talk to your tax professional for specific advice on the tax benefits of leasing.

Payment options

While fixed monthly payments are the norm, they are not your only option. Depending on your company’s financial situation, your equipment lease financing can include one of several payment plans that may be more appealing.

If your company’s cash flow comes and goes with the seasons or weather, you might want to consider what is called a “skip lease”. A lease with this repayment structure allows you to skip payments during slow months without being penalized. They are ideal for recreational and agricultural businesses that rely heavily on certain times of the year for significant portions of their revenue.

Step-up leases provide a solution for companies with limited cash that are depending upon the acquisition of specific equipment to increase revenue. This type of lease recognizes that the company will be able to handle increased lease payments over time, and keeps payments low at first then ramps them up according to a pre-determined schedule.

An alternative to a step-up lease is a 60- or 90- day deferred lease. Just as its name implies, this lease allows you to defer your first payment for 2 or 3 months. Usually you will not have to present a down payment with this option.

Ending your lease

Lease terms range anywhere from 6 to 120 months, although the majority fall between 12 and 60 months.

The lease term that you decide upon will depend heavily on what you decide to do with the equipment at the end of your lease. Usually, you have four choices. You can:

• return the equipment to the lessor with no future obligation.
• renew the lease.
• purchase the equipment for a nominal fee or fixed price agreed upon at the lease inception.
• purchase the equipment at fair market value

Before agreeing to any particular end of lease clause, carefully consider what state the equipment will be in at the end of the lease, and whether you’ll want to obtain a newer model at that time. Also consider the chances that you’ll want to get out of the lease early – if you think it’s likely, be sure that your lease doesn’t contain substantial penalty clauses for early withdrawal.

Equipment Finance Providers

There are three main types of leasing providers: brokers, captive leasing companies, or independent lessors.

Broker – an equipment leasing broker is a lot like an insurance broker, they act as the go-between. The broker will take your lease requests to the banks and financial service companies most likely to agree to finance your asset. They will negotiate for the best interest rate and payment schedule on your behalf. The main advantage of using a broker is the fact that you get to utilize the leasing expertise of the broker and it is the bank or the financial institution that pays the broker’s fee – their fee does not come out of the pocket of the you, the lessee.

Captive leasing company – As a subsidiary leasing arm of a manufacturer or dealer, a captive leasing company’s main purpose is to provide leasing to its parent company and/or dealer networks. Typically you’ll only encounter them when you’re obtaining a lease directly from a dealer.

Independent lessor – Independent lessors are funding sources that lease directly to businesses. These can include banks, equipment lease specialists, and more diversified financial companies.

Choosing the right leasing provider

It’s important that you evaluate prospective lessors just as carefully as they’re evaluating you. One way to approach the decision is too look for a lessor who will act like a partner. Instead of treating you like a faceless account, they should take the time to answer your questions and help you through rough spots, instead of repossessing your equipment or bumping up your rates the first time you’re late with a payment.

You should also look for a leasing provider with the right experience. Some lessors specialize in specific industries or types of loan: doing a little research can quickly tell you if your potential lease providers have the expertise you require.

No related posts.