The terms "equipment leasing" and "equipment financing" are familiar to many business leaders. However, there are some significant differences to be aware of.
Both terms are frequently used interchangeably. This is because they both describe how a company can finance capital equipment. The main differences, however, are the ownership of the assets being leased or financed, as well as the structure of the payments.
Accounting, tax, and legal treatment are all affected by these differences. We'll talk about business equipment leasing in this blog.
The Characteristics of a Commercial Equipment "Lease"
We've capitalized the key terms you'll see in a lease contract to make things easier.
The "Lessee" selects "Leased Equipment."
The "Lessor" purchases the Leased Equipment with the intention of leasing it to the Lessee.
Until the end of the Lease "Term," the Lessor retains ownership of the Leased Equipment.
The Lessee is responsible for the Leased Equipment's upkeep and insurance.
Throughout the Term, the lessee pays "Rent."
Lessee is entitled to quiet enjoyment (i.e. use) of the Leased Equipment as long as the Lessee is not in "Default."
Lessee has a "Purchase Option" to buy the Leased Equipment at the end of the Lease Term as long as Lessee has not committed a material "Default."
A "Capital Lease" or a "Finance Lease" is a lease in which the customer is required to exercise the Purchase Option.
A "True Lease," on the other hand, is one in which the Lessee has the option at the end of the Term to (a) purchase the Leased Equipment, (b) extend the Term, or (c) return the Leased Equipment to the Lessor.
What Business Equipment Leasing Professionals Know
Here are a few things you might not know about business equipment leasing that would qualify you as an expert:
If your contract does not include a Purchase Option, it is classified as a Rental Agreement rather than a Lease.
The Leased Equipment can only be used by the Lessee and any Co-Lessees. If you intend to allow others to use your Leased Equipment, check with your Lessor first to ensure that your insurance covers such usage.
Your obligation to pay Rent as a Lessee is absolute and unconditional. This is referred to as a "hell or high water" payment clause. This means that even if you have a problem with your Leased Equipment, you must continue to pay your Rent. It's the same as if you had a bank loan and couldn't get out of paying it back because the machine you bought with the money the bank lent you didn't work.
The good news is that most Leases will pass on to the Lessee the benefits of any warranty coverage or recourse against a manufacturer and seller via the Lessor. As a result, you will be able to contact the vendor to resolve any problems with your Leased Equipment.
An Operating Lease is not always a True Lease. An Operating Lease is a type of True Lease in which: (1) the Lessee uses the Leased Equipment for less than 75% of its economic useful life; (2) the present value of the minimum payments under the Lease is less than 90% of the Leased Equipment's purchase price; and (3) the Purchase Option is not for a bargain amount. The Purchase Option price in an Operating Lease is usually determined by the Fair Market Value of the Leased Equipment, rather than a set price.
We understand that this is a lot to take in.
That is why you must seek the advice of professionals.
Every member of the Raptor Financial Group is dedicated to putting together the best possible transaction. Whether it's business equipment leasing or something else, we'll be able to assist you in reaching your objectives.
If you'd like to learn more about your financing options, give us a call or send us an email. We promise to keep the hardcore business equipment leasing talk to a minimum.