A lot of business leaders are familiar with the concepts of “equipment leasing” and “equipment financing.” However, there important differences to note here.
People often use both terms interchangeably. That’s because both describe ways for a business to finance capital equipment. Having said that, the main differences have to do with ownership of the assets being leased or financed as well as how the payments are structured.
These differences result in variations for purposes of accounting, tax and legal treatment. In this blog, we will focus on business equipment leasing.
The HallMarks of a Business Equipment “Lease”
To make it easier, we are capitalizing the key terms that you can expect to see in a lease contract.
- “Lessee” chooses the “Leased Equipment”
- “Lessor” buys the Leased Equipment for the purpose of leasing it to Lessee
- Lessor retains ownership of the Leased Equipment until the end of the Lease “Term”
- Lessee is responsible for maintaining and insuring the Leased Equipment
- Lessee pays “Rent” throughout the Term
- As long as Lessee is not in “Default”, Lessee is entitled to quiet enjoyment (i.e. use) of the Leased Equipment
- As long as Lessee has not committed a material “Default”, Lessee has a “Purchase Option” to buy the Leased Equipment at the end of the Lease Term
- A Lease where the customer is required to exercise the Purchase Option is known as a “Capital Lease” or a “Finance Lease”
- Conversely, a “True Lease” is one where the Lessee can choose between the following end of Term option: (a) purchase the Leased Equipment; (b) extend the Term; or (c) return the Leased Equipment to the Lessor
What The Business Equipment Leasing Experts Know
Here are some things that you might also know, but that would make you a business equipment leasing expert:
- If your contract does not contain a Purchase Option, then it is technically a Rental Contract and not a Lease.
- Only the Lessee and any Co-Lessees are permitted to use the Leased Equipment. If you are planning to allow others to use your Leased Equipment, then check first with your Lessor and make sure your insurance covers usage by others.
- As a Lessee, your obligation to pay Rent is absolute and unconditional. This is known as a “hell or high water” payment provision. This means that, if there is a problem with your Leased Equipment you are still required to keep paying your Rent. It is no different from a bank loan where you could not get out of paying the bank because the machine you bought with the money the bank lent you does not work as expected.
- Here’s the good news: most Leases will pass the benefits of any warranty coverage or recourse against a manufacturer and seller through the Lessor to the Lessee. So you will be able to call on the vendor to remedy any issues you have with your Leased Equipment.
- Not every True Lease is an Operating Lease. An Operating Lease is a specific type of True Lease whereby: (1) the Lessee uses the Leased Equipment less than 75% of its economic useful life; (2) the present value of the minimum payments under the Lease are less than 90% of the purchase price of the Leased Equipment; and (3) the Purchase Option is not for a bargain amount. An Operating Lease typically does not stipulate a set Purchase Option price; rather the Purchase Option price will be determined as the Fair Market Value of the Leased Equipment.
We know that is a lot to unpack.
However, that’s why you need to turn to the experts.
Every professional member of the Armada Team is passionate about structuring the right type of transaction. Be it business equipment leasing, or something else, we will be able to help you achieve your business goals.
So give us a call or send us an email if you’d like to learn more about your financing options. We promise we will only have as much hardcore business equipment leasing talk as you want.
When looking for equipment leasing, equipment financing, assistance with working capital loans, or searching for leasing companies that you can trust, you can rely on Armada. Our mandate is to be truthful and let you know where you stand. We work for you to structure the right leases and financing to you to achieve your business goals.
Do not hesitate to get in touch to discuss your equipment financing options. Our knowledgeable and friendly capital equipment financing professionals are happy to serve you to help you grow your sustainable and profitable business.
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