Equipment Leasing Terms 101
Updated: Oct 23, 2019
If you have never had experience with equipment leasing before, it can take some time to understand the language that is used.
When you can fully understand the terminology the lending process is truly easier to understand. Lionhart Capital has been together this glossary of terms that are commonly used in the leasing industry.
Advanced Lease Payments
Most leases require a specific number (1-2) lease payments in advance. The total numbers of payments during the lease are reduced by the advanced payments.
A Capital lease (sometimes called Dollar-Buyout Lease) is used for long-term on items that do not become technologically obsolete, such as machinery. A Capital lease provides a fixed monthly payment as well as a guaranteed buy-out option, usually $1, at the end of the lease term. The advantage to this type of lease is that there is no disagreement about the equipment’s value at the end of the lease because the buy-out terms are part of the initial agreement.
In a capital lease, the lessee is considered the owner of the equipment. When the lease is signed, the lease payments are recognized as both an asset and a liability on the balance sheet. The company can claim the depreciation on the asset each year while also the claim the lease payments as liabilities.
Also known as a Fair Market Value (FMV) lease or a True Lease, an operating lease is a short term lease of business equipment and often used for assets in which technology changes constantly, such as computers. At the end of the lease period, the asset is returned or they are given the option to purchase the equipment at “fair market value”. Since the lessee does not assume the risk of the ownership, payments for this type of lease are viewed by the IRS as rent payments and are 100% tax deductible operation expenses and the lease does not affect the balance sheet.
This type of lease is offered to businesses in which are seasonal and only make money at certain times of the year.
Finance ChargeA financed charge is fee in which is typically charged for the cost of borrowing money. The finance charge is covered within the overall rate factor. This means that the total monthly payment of the lease will include the cost of the equipment plus the finance charge.
The person/business that is leasing the equipment from the owner (the lessor).
The owner of the equipment whom is collection the lease payments.
This is amount of money that is put down prior to a lease. It is to make money available to the lessor should the lessee owe money at the end of the lease or fail to make payments.