• 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.