Equipment Lease Financing

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B2B EQUIPMENT LEASE
FINANCING INFORMATION

Q: What is a B2B equipment lease?
A: In recent years, equipment leasing has become an accepted and economical source of financing. A lease can finance the acquisition of equipment or act as an additional source of working capital. In this respect, it acts as an alternative to traditional debt financing.  A lease is a contract. By its terms, the "Lessor" (Leasing Company) gives the "Lessee" (The Customer) the exclusive right to use and possess its equipment for a specified period.
The lease contract may be a single transaction involving specific equipment, or it may be written as a "master" lease with a continuing arrangement, on specific equipment having separate schedules executed from time to time. In either case, the contract will require the lessee to make periodic payments to the lessor for the use of the leased equipment.
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Q: Why might I want to lease rather than buy my equipment?
A: Leasing many times presents better options rather than buying.  When you lease equipment, your cash outflow is usually significantly less than when you buy the equipment outright or use a term loan to secure it.  Leasing can be a means of "off balance sheet" financing.  This allows you to preserve your lines of credit, bank loans, etc. for a future time.  (See how leasing can benefit your financial statements). 
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Q:  What types of equipment can I lease because my bank told me they wouldn't even consider what I want ?
A: Equipment leasing companies are highly flexible in the types of equipment that they will lease (See a list of types of equipment that can be leased).  Your options are almost limitless.  Because equipment lease companies handle and structure financial agreements exclusively for business equipment acquisitions and purchases, they have more experience than most bankers and other business financing institutions.  This means that they will make your proposal happen even when the bank won't.
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Q: What companies benefit most from equipment leasing?
A: Equipment leasing is truly one option that can work for almost any type of company, large or small, and in any industry.  For example, large organizations such as Best Buy lease their equipment as well as small businesses such as Valeria's Salon in Dallas.  They only real determining criteria is often how long the company has been in business.  Usually 2 years is secure, and some programs will even take 6 months. (See the benefits of equipment leasing)  
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Q: What types of equipment leases are available?
A: There are generally these following four types of leasing options available:

• FAIR MARKET VALUE: (Operating Lease) This purchase option is the most commonly used purchase option since it has the most tax advantages and options at the end of the lease. At lease end, the lessee has the option to continue to lease the equipment, return the equipment, or purchase the equipment at its fair market value.  These types of leases usually do not appear on the balance sheet as a liability and rather are reflected as an operating expense.


• 10% PURCHASE OPTION: This option establishes a fixed purchase price at the end of the lease. The customer has the option to purchase the equipment for 10% of the original purchase price, continue to lease it, or upgrade the equipment.


• $1.00 PURCHASE OPTION: This option is for those who want to have a nominal purchase option at the end of the lease term. They simply pay $1.00 plus a small charge for the processing, primarily if any title transfers are required. The lessee is typically treated as the owner of the equipment for tax purposes.
  


• SALE AND LEASEBACK: This is different from the above three options because it is not used to purchase equipment, rather it gets working capital from equipment that the company already owns.  A company can "sell" and then "leaseback" the equipment from an equipment leaser thereby obtaining working capital and retaining usage of the equipment.  For example, if a company owns $40,000 in equipment.  It can sell the equipment to a leaser and receive $40,000.  Then, it can leaseback the equipment to still use in the business and simply make monthly payments to regain ownership of the equipment.

As with any financial decision, we suggest you consult your accountant when determining what type lease structure is best for your particular situation.
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Q: How do I get tax benefits from a lease?
A: In a Capital Lease, the Lessee is treated as the owner of the equipment for tax purposes. Therefore, it can claim depreciation deductions on its tax return. On the other hand, in a Operating Lease, the Lessee is not the owner of the equipment for tax purposes. It cannot claim depreciation deductions on its tax return. Nevertheless, because the Lessor is entitled to the tax benefits on the equipment, the Lessee will benefit from lower rental payments, often below market rates. In addition, the lessee normally would receive deductions for the full amount of rental payments on its tax books.
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Q: How can equipment leasing help my cash flow?
A: Cash flow is the normal flow of cash into and out of your business. Increasing cash flow may simply mean reducing payments to be made by your business. Often, leasing companies assume that equipment will have a residual resale value at the end of the lease and reduce the rental payments accordingly. This too produces a real cash savings. Finally, a Operating Lease can help an AMT taxpayer avoid additional minimum taxes, which would otherwise be due if the taxpayer owned the equipment. MACRS depreciation creates tax preferences but lease payments or rentals do not. This avoidance of minimum tax liability may be a real current cash savings, which is especially important because all taxpayers must pay their estimated minimum tax liability to the IRS on a quarterly basis.
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Q: Is there a down payment?
A:Leasing is generally considered 100% financing, with the leasing company paying the entire purchase price of the asset and leasing it to the lessee with no down payment. Operating leases requires the lessor to pay the full purchase price without any participation by lessee. Leases with relatively high risks for the lessor may require additional security. Additional security could take the form of advance rentals, a pledge of assets or security deposit.  
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Q: Can payments be adapted to seasonal and/or irregular cash flow needs?
A:Yes. Some industries experience predictable irregular cash flows and/or seasonal slowdowns due to weather conditions, market conditions or a variety of other reasons. The impact of weather on the construction industry is just one example. For such businesses, leases may be arrange with payment due at irregular time, such as monthly from April to November only, in conjunction with the productive use of equipment.
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