Glossary

Advance Lease Payments. Most leases call for a specific number of lease payments in advance. 1-2 payments is a typical requirement. The total numbers of payments during the lease are reduced by the advance payments. (Bank financing typically require much larger "down payments," typically 10-25% of the purchase price to close the loan along with "origination" and other fees.

"Application Only".  A streamlined credit application and review procedure that only requires the submission of a single page application with basic information about the business’ principals, bank and trade references. This type of program does not require financial statements, tax returns, business plans or other more detailed disclosures.

End of Lease Options. What happens to the equipment after all payments have been made. Typical options are the $1 Buyout, FMV, PUT, equipment return, continued leasing and more. .

Fair Market Value (FMV) Lease. Provides flexibility and lower monthly payments than the Finance Lease Format. Key benefits include a number pre-set end-of-lease option:

• Return the equipment with no further obligation, or
• Purchase the equipment for its fair market value, or
• Re-lease the equipment for its fair market value, or
• Continue leasing on a month-to-month basis

The FMV lease may also qualify as a tax deductible operating expenses.

Finance Lease ($1 Buyout, Capital Lease) These terms describe leases that combine lower, fixed monthly payments with the guaranteed-in-advance right to purchase the equipment at the conclusion of the lease term at a pre-determined price. These leases generally do not qualify as deductible operating expense and must be amortized and depreciated. There are, however, some significant other tax benefits under I.R.S. section 179, that may be available to your business .

Insurance. Because leased equipment is technically owned by the lessor until the satisfactory conclusion of the lease term, (proof of) all risk/casualty insurance will be required showing the lessor as a "named insured."

Lessee. The entity that is leasing the equipment from its owner, the lessor.

Lessor. The owner of the equipment to whom lease payments are made.

Master Lease. One lease (and one credit approval) for several pieces of equipment purchased at different times from one or more vendors. **Time limitations may apply.

Off-Balance Sheet Financing. Financing that does not add debt to a company’s balance sheet. This can be extremely important to companies with bank and/or other lender-imposed key operating ratio requirements. Under a true lease for example, the lessee does not show the leased equipment as an asset (the lessee does not own the equipment, nor does the lease structure contemplate ownership), nor therefore, is the lessee required report the corresponding long term liability.

Operating Lease. Any lease that is not a capital or finance lease. See FMV lease (above).

PUT Option (Purchase Upon Termination). A specialized option that can be offered in conjunction with an FMV lease that requires a purchase of the equipment at the conclusion of the lease at a fixed-in-advance percentage of the original purchase price (e.g. 10%).

Rate Factor. Once the equipment cost has been determined, the actual monthly lease payment (before tax and one-time fees) can be computed by multiplying "the factor" (usually expressed as a 5-digit, decimal number) by the equipment’s cost.

Residual Value. The remaining (market) value of the equipment at the end of the lease term

Sale Lease Back. A technique for re-capturing cash previously expended on equipment by selling that equipment to the lessor who in turn leases that same equipment back to the company over a period of 12 to 60 (or more) months.  Older used equipment may be subject to an independent valuation appraisal prior to funding.

Security Deposit. An amount paid at the beginning of the lease that is held by the lessor until the satisfactory payment of all amounts due under the lease terms, at which time the security deposit amount is returned to the lessee.

Step Payment Lease. Lease payments are stepped up (or down) to accommodate the lessee’s anticipated cash flow pattern as the company begins to see its return from the acquired equipment. . e.g. payments might be lower initially to allow a company start generating.

True Lease (Tax or Operating Lease). A true lease, by definition, does not call for the full payout of the equipment cost during the lease term, nor does a true lease contemplate a transfer of title following the conclusion of the lease. The lessee is only "paying for the equipment during a portion of that equipment’s useful life. Hence the lease payments are often treated as 100% tax deductible operating expenses. The lease generally does not appear on the balance sheet as a business asset or as a business liability. This type of lease also offers the lowest payments for a given term. A true lease may (but does not have to) include an FMV (fair market value) option which allows the lessee to purchase (take full ownership of) the equipment for its legitimate fair market value at the time the lease terminates

Working Capital. In (basic) accounting/financial terms working capital is defined as current assets-current liabilities. It is one measure of a business’ "ready cash." Leasing conserves working capital by allowing a business to better match (time) its expenses for the acquisition of equipment to the revenue generated by that that equipment generates. (Why pay in advance?)