What is a Lease? A contract where one party (the lessor) gives another party (the lessee) the exclusive right to use and possess its equipment for a specific period of time. A lease is simply an agreement by one party (lessee) to pay a rent for a specific amount of time in exchange for the right to possess and use the owner's (lessor) property. The lessee does not own the property during the term of the lease, however, at the end of the lease, the lessee usually has the option either to purchase, re-lease, or return the property to the lessor. Generally, leases take the form of written contracts with the following detailed terms and conditions: length of lease, timing and amount of payments, and end of lease options and provisions.
Lessor - The funding source.
Lessee- The business and/or principals signing the lease.
90 Day Deferred Programs - For strong lessee's who would like to like to begin their payments after the equipment begins to generate income. Only strong lessee's over 2 years in business under current ownership generally qualify for 90 day deferred plans.
Capital Lease - Typically, $1.00 out leases are considered capital leases. This type of lease is very similar to a financing agreement, meaning that payments are similar to a bank loan. Equipment is placed on a depreciation schedule and written off over a period of years. Consult your tax advisor regarding the fact that capital leases are not 100% tax deductible.
DOC the Deal - This step occurs after credit is approved. Leasing documents from the documentation department for the Lessee are prepared for an authorized signature.
Fair Market Value (FMV) - Choose this option for a specified term (1 to 5 years) and there are two options at the end of the lease term. The equipment may be purchased for the fair market value (FMV) or returned to the leasing provider with nothing further to pay. The FMV is typically 10% of the original cost of the equipment. The benefits of an FMV lease are lower monthly payments and potential tax benefits (discuss with your tax advisor).
Finance Agreement - Banks typically provide finance agreements. With a finance agreement, there may be a down payment required up front, and the loan is amortized for a period of years. When the last payment is made the agreement is fully satisfied. A lease can be considered a type of finance agreement if it has a $1.00 buyout at the end.
Funding Source - The finance company, or bank that will be paying the vendor.
Hard Costs - Equipment and it's tangible peripherals are considered hard cost. Most other expenses are soft costs including labor, training, etc.
Operating Lease - These leases have a buyout clause at the end of the term. True operating leases can be 100% tax deductible. This means that all monthly payments can be written off as an expense and the equipment does not need to be depreciated over a term of years.
Prefunding - Some vendors want to be paid at least a portion of the deal up front, usually 50% of the invoice amount. This is called prefunding. It must be approved by the funding source on a case-to-case basis. Both the vendor and the lessee must be stable for acceptance.
Recourse (or "vendor recourse") - Generally applies to the funding source (lessor's) right to require the manufacture or distributor take back and/or take responsibility for re-marketing equipment that is not paid for as a result of default by their customer(s), the lessee.
Soft Costs - Freight, labor, software, training and other intangible items are considered soft costs. Most funding sources will only allow a certain percentage of the total transaction to be soft costs. These costs usually cannot be recovered in case of default and therefore increase the riskiness of the deal.
UCC-1 Filing - This is a filing with the state the perfects the security interest of the funder. Most funding sources will want UCC-1 filings to be recorded. |
