Dealers or manufacturers may require advance deposits ranging from 10% to 100% of the total cost when placing orders for their equipment. Equipment lessors can provide this advance funding via two addendums to the lease, Progress Payment or Pre-Funding, that hold the lessor harmless for any problems with the equipment not arriving or not working properly.The Progress Payment Addendum acts as an “acceptance” of the lease and its terms. The lease commences and monthly payments are due per the contract. The lessor can then advance payments to the dealer or manufacturer per their terms. An example would be a vendor that requires 30% with purchase order, 60% paid prior to shipment and the remaining 10% upon delivery.A Pre-Funding Addendum allows the lessor to advance payment to a vendor and holds the lessee responsible should the lease not commence. The lessee returns any payments lessor made to vendor, if the lease does not commence. The lessee also pays a pro rated lease payment until the lease funds.How Pre-Funding charges are calculated:Lessor advances 50% of a $100,000 lease and the monthly lease payment is $2,125.

Why does my leasing company (Lessor) require my landlord to sign a waiver?

The lessor’s reason for wanting a landlord waiver is to ensure that they maintain clear title to leased equipment. Most commercial property leases have a clause that stipulates that the tenant’s personal property may be seized and sold for non payment of rent. The leasing company wants to make sure that the equipment they are leasing to the tenant (lessee) does not fall into this category. The landlord typically has no problem signing a waiver as they prefer a happy tenant and understand that new equipment is essential for the continued success of most businesses. The success of a tenant and therefore the ability to pay rent is the preference of most landlords.

The Landlord Waiver addendum to an equipment lease is of even greater importance to a Lessor when the leased equipment is affixed or attached to the landlord’s property. In a typical commercial property lease, items that are attached become classified as fixtures, and thus the property of the landlord. By having the landlord sign off in advance stating that the equipment will remain the property of the Lessor simply avoids any confusion if a dispute arises.

Personal Guaranty clauses typically contain a sentence similar to this, “Guarantor agrees that Lessor can renew, extend, or otherwise modify the terms of the Agreement and Guarantor will be bound by such changes.”  This language allows the Lessor to change the lease terms due to a re-write or deferment (i.e. Lessee become delinquent or requests a modification of the contract) and the personal guarantor(s) would still be bound & liable.

Equipment lease agreements typically contain a sentence similar to this, “YOU HAVE NO RIGHT TO SELL, TRANSFER, ASSIGN, SUBLEASE, OR ENCUMBER THE EQUIPMENT OR THIS AGREEMENT.” This sentence protects the lessor’s asset/collateral and maintains their credit underwriting guidelines, should you ever want to transfer the collateral or lease to another party. It is possible to assign the lease, but the new party (assignee) will need to go through the credit review process with the lessor and get approval. Once the assignee has been approved, the existing lessee (assignor) should find out if the personal guarantors, if any, will be released. The lessor in most instances will not release the existing personal guarantors, unless the assignee’s credit profile is substantially stronger than assignors.

• Equipment leasing and finance accounts for nearly $250 billion in annual capital equipment expenditure —- almost a third of all commercial equipment investment.
• Leasing and finance contributes as much as 3% of the real GDP annually.
• 20,000 equipment leases are written each day.
• Eight out of 10 U.S. companies lease and finance all or some of their equipment.
• Small businesses are twice as likely to lease or finance their equipment as to purchase it outright.
• More than 250,000 Americans are employed in the equipment leasing and finance Industry.
• Each $1 billion spent on leased equipment creates an estimated 30,000 jobs in the U.S.

Facts provided from the ELFA 2006 Annual Report  

There are many alternative payment structures for equipment leases. Two of the most common are: (1) Deferred payment and (2) Seasonal payment lease programs.  Deferred payment lease programs are for companies who need equipment today, but recognize the equipment will not generate revenue immediately. In this case, a 60 or 90 day deferred lease structure looks very attractive. The lease is structured so that there are nominal or no payments in the initial months. There is normally one advance payment required. The next payment usually isn’t due until the second or third month of the lease – 60 to 90 days later. This type of payment structure can be used for both FMV and $1 buyout leases.  Seasonal payment lease programs are for companies that have seasonally sensitive cash flow during the year. Some examples are schools and agriculturally related businesses. Payments are structured so there are lower payments during a portion of the year when business is slow and higher payments during the rest of the year in conjunction with more positive cash flow. This type of payment structure can also be used for both FMV and $1 buyout leases. These are just a couple of leasing alternatives that should warrant the attention of companies attempting to more suitably balance their lease payments with revenue.   

On Fair Market Value and Option leases, you’ll find equipment lease agreements have notification clauses regarding lease termination. Generally, the lessee will need to notify the lessor ninety days or more before expiration of a lease of their intent to return the equipment or purchase the equipment. If the lessor isn’t notified of lessee’s intent to return or purchase the equipment, the lease will extend for another fixed period (our lease extends for 90 days). Lessors require the notification so preparations can be made for resell of the equipment or an appraisal generated for the fair market value price. Lease payments beyond the initial lease term and made in the extension period are referred to in the industry as “evergreen” payments. $1.00 residual leases do not have this same notification requirement since ownership transfers to lessee once all payments are successfully completed.

FMV Leases:

• Also known as True Leases, Tax Leases or Operating Leases.
• Designed for businesses seeking a lower monthly payment with greater flexibility at the end of the lease       term as well as maximum tax advantages. These businesses are more concerned with equipment becoming obsolete than ownership.
• Ownership is retained by Lessor for tax purposes.
• Often used as a hedge against technology changes, at lease end, a business may: (1) purchase the equipment for its Fair Market Value, (2) return the equipment, (3) replace the equipment with new equipment under a new lease or (4) extend/renew the lease term.
• The business can usually deduct lease payments as a business or operating expense.

$1 Buyout Leases:

• Also  known as Capital Leases or Finance Leases.
• Designed  for businesses that are fairly certain they want to own the equipment after the  lease term ends while paying a fixed/predictable lease payment. The business  does not believe the equipment will become obsolete quickly.
• Business  owns the asset at the end of the lease term, provided all lease obligations  have been fulfilled.
• At  the end of a lease term, a business purchases the equipment for $1.
• The  business can claim depreciation and interest expense deductions.

Tax implications - One of the main benefits of FMV Leases  is that you may be able to fully claim lease payments for tax purposes. In  contrast, the IRS considers $1 Buyout Leases little more than installment  purchase plans. Although $1 Buyout Leases allow you to spread your payments  over time, they are not tax advantaged in the way FMV Leases are.
  It’s important to discuss  the tax implications of your equipment lease financing with an accountant  before signing any contract.

Before entering into an equipment lease, make sure you ask your lender what happens if you wish to pay the lease off early.  Some lessors require you to pay the contract in full (all lease payments), most will offer a nominal discount off the remaining gross receivable (1% to 5%) and in certain situations lessees even get a payoff with no additional interest charges.  In addition, you’ll need to factor in the residual, sales tax and personal property tax.

Why don’t equipment lessors just charge the remaining principal balance like a loan?  Lessors need to be compensated for the risk of tying up their money in a long term fixed rate investment (your lease).  Lease contracts have a fixed implicit rate, but lessor’s cost of funds change with short term trends. 

Ask your leasing representative upfront what their policy is on early payoffs.

It’s a number calculated by a formula based on data in your credit report. It gives lenders an idea of how risky it is to lend you money. Scores generally range from 300 to 850. (the higher the number the better). Median score in the United States is 723

Why should I care? The higher the score, the better interest rate you will get.
What determines my score? The score is based on information credit bureaus keep on file. That is why it is important to make sure this information is accurate. Most consumers have heard of a “FICO” score – which is the formula that Fair Isaac, a California company, developed. But not everyone uses FICO. Your lender may use a different formula, however, here is what a FICO score looks at:

• 35 percent of your score is based on your payment history, which shoes if you pay your bills on time
• 30 percent on the amounts you owe each account
• 15 percent on how long you have had credit
• 10 percent on the types of credit (auto loans, credit cards, mortgages)
• 12 percent on any new credit you taken on recently

Where can I get my score? You can buy it online from a variety of sources, including the three major credit reporting agencies, This is different from getting a free credit report. You are now entitled to one free report per year.

For more info:
Federal Trade Commission: www.ftc.gov

To learn more about credit reports, scores and your rights.

www.annualcreditreport.com (877-322-8228).

This site was set up by the Big 3 credit reporting agencies and you can request a free copy of your report.

www.myfico.com

Good information about credit.

3 Major Credit Reporting agencies
www.experian.com  888-397-3742

www.transunion.com 877-322-8228

www.equifax.com 800-685-1111