Exploring the most frequently asked questions about leasing

In the coming weeks we will take a closer look as some of the more commonly asked questions regarding equipment leasing. The sections will cover:

• How long do I have to be in business? What if I have a startup business?
  
• Is there a limit on how much I can lease in terms of dollars?
  
• How long does is the process?
• What types of equipment can be leased?
• Does the equipment have to be new or can I lease used equipment?
  
• What is the rate?
• Are lease rates variable?
  
• Can you write off a lease payment?

What Types of Companies Lease Equipment?

There should be no misconception that only large companies lease equipment. It does not matter whether you are a small one person operation or a major multi-billion dollar corporation. All companies are able to take advantage of leasing in one form or another. As you've seen there are a number of programs available so that every company can have a fair shot at getting the equipment needed to operate their business successfully.

As there is no limit, so to speak, of the type of company that can obtain an equipment lease; you will also find that the types of equipment that can be leased are just as varied. In keeping with the diversity of company and equipment types, you will also find that lease transactions can range from just a couple thousand dollars to billion dollar transactions.

Equipment Leasing Programs - Other Programs

First off, I apologize for the delay in updating the leasing blog. Let’s look at some other forms of equipment lease programs. We will overview deferred lease payment programs, seasonal payment / skip lease programs and pre-paid purchase option programs.

• Deferred Payment Programs:

For companies that need equipment today yet will not generate profit / revenue for a short period of time, a 60 to 90 day deferred lease structure is very attractive. The lease is structured so that the initial months have nominal or no payments. This type of lease can also be structured as a finance lease or a true lease. Usually one advance payment required, and the next payment is not due until the second (60 day) or third (90 day) month of the lease.

• Seasonal Payment or Skip Lease Programs

Especially ideal for those in agricultural industries, this lease is designed for businesses with seasonal cash flows. The lease can be tailored so that payments might be lower during the summer months and higher during the rest of the year or vice versa. School systems also benefit from this type of lease structure.

• Pre-Paid Purchase Option:

For new businesses and those with not so perfect credit, the pre-paid purchase option allows you to lower your monthly payments by pre-paying a percentage of the equipment cost. Typically, you will have the ability to purchase the equipment at lease end for $1.00.

Equipment Leasing Programs - Capital Lease

The simple definition of a capital lease is: A lease obligation that has to be capitalized on the balance sheet. In more detail, the capital lease structure allows you to buy the equipment at the end of the lease term. Typical end of lease options for a capital lease are the 10% or $1.00 purchase option. This is especially advantageous for companies that intend to keep the equipment at the end of the lease term. You can also trade in the equipment for new equipment or sell the equipment at the end of the lease.

To be more specific, this lease structure is treated by the lessee as both the borrowing of funds and the acquisition of an asset to be depreciated. The lease is recorded on the lessee's balance sheet as an asset and corresponding liability.

Capital Leases will contain one or more of the following:

• Ownership of the property is transferred to the lessee at the end of the lease term
• The lease contains a purchase option such as 10% or $1.00 out
• The lease term represents at least 75 percent of the estimated economic life of the leased property
• The present value of the minimum lease payments at the beginning of the lease term is 90 percent or more of the fair value of the leased property to the lessor at the inception of the lease less any related investment tax credit retained by and expected to be realized by the lessor.

Equipment Leasing Programs - True Lease

A True Lease which is also known as a fair market value (FMV) lease provides the most standard type of lease agreement. This type of lease structure will offer you the lowest monthly payment for new/used or sale leaseback leases. In some cases, your business can claim the lease payment as a tax deduction. This lease structure will allow you many options at the end of the lease. Such options are:

• Purchasing the equipment at the current fair market value

• Upgrading to new equipment

• Renewing the lease

• Returning the equipment

Equipment Leasing Programs - Finance Lease

Unlike an Operating Lease (see previous post) a finance lease is a form of leasing where you, the lessor, pay the full cost of the equipment, plus interest, over the primary term of the lease agreement. Monthly payments are determined during the lease structuring process and represent the full value of the equipment.

Key points of finance leasing:

• The value of the asset (equipment being leased) is shown on your balance sheet
• This lease structure is typically not used if rapid tax benefits are desired.
• Opportunity to own the equipment at the end of the lease is more advantageous being that the equipment can be purchased for a minimal cost.

Equipment Leasing Programs - Operating Lease

Our previous post contained examples of typical leasing programs. As with any other financial transaction, you need to be certain that the structure of your lease should match your business goals and cash flow requirements.

One of the most common types of leasing is an operating lease. What is an operating lease and what can it do for me and our company? Well, let's look at the basics.

Operating leases are a form of off-balance sheet financing that provides the option to continually upgrade or replace your current equipment without the worry of ownership. End of lease options allow you to return the equipment so that technological obsolescence is avoided. You will find that an operating lease will have a lower monthly payment than other lease / finance alternatives.