Below is a small glossary of commonly used leasing terms. We hope this will make leasing easier to understand and result in a fast, smooth transaction.

Leasing Terms

1. Lease: An agreement in which one party, the Lessor or owner of the equipment, permits another party, the Lessee, to use equipment for a specified period of time, in exchange for a series of payments.

2. Capital Lease: From a financial reporting perspective, a capital lease is one which has characteristics of a purchase agreement, and also meets certain criteria established by the FASB. Such a lease is required to be shown as an asset and related obligation (capitalized) on the balance sheet of the lessee.

3. Purchase Option: An option in the lease agreement which allows the lessee to purchase the leased equipment at the end of the lease term, and which is stated at either a fixed amount or at future fair market value of the lease equipment.

4. True Lease: (for tax purposes) - "True Lease" is a term for defining types of transactions which qualify as leases under the Internal Revenue code so the lessor can claim tax incentives of ownership and the lessee can claim rental payments as tax deductions.

5. Lease Renewal Option: An Option in the lease agreement which allows the lessee to extend the lease term for an additional period of time beyond the expiration of the initial lease term, in exchange for lease renewal payments.

6. Bundled Lease: A lease that includes many additional services such as maintenance, insurance, and property taxes are paid for by the lessor, the cost of which is built into the lease payments. synonymous with Full-Service Lease.

7. Fair Market Value: The value of a piece of equipment if the equipment were to be sold in a transaction between a willing buyer and a willing seller for equivalent property under similar terms and conditions.

WINNING WITH LEASING

by Joel Ronan

In business, cash is king. Though arguable on the surface, without ready cash or an open credit line, a company's ability to grow is severely hampered. That's why leasing business systems instead of buying them makes sense.

Attractions of Leasing

It's the use of tools that makes money, not ownership. Leasing allows such use of equipment, with attractive terms compared to purchasing. From the accounting standpoint, there are two kinds of leases: operating leases and capital leases (See "Leasing Terms Explained"). Both have distinct advantages. (Note: When considering lease options, consult a tax or accounting professional for advice in your specific situation.)

Operating leases may offer more up front tax advantages, since payments are often fully deductible, while capital leases often provide tax benefits as long-term depreciation and interest deductions (see Sidebar, "Operating Lease Vs. Capital Lease").

An operating lease, similar to renting, typically requires that the equipment be turned in at lease expiration, or purchased at fair market value. While payments are lower than with capital leases, the equipment cost at lease end is much higher since the purchase price is its current fair market value, a disadvantage for customers who wish to own the equipment.

A capital lease is similar to financing. Typically, the equipment cost is depreciated over time, and interest expense deducted on financial statements/tax returns. Generally, capital lease payments are not directly expensed as in operating leases. A capital lease often allows purchasing the equipment at lease end for a nominal amount, such as one dollar, or 10 percent of the original cost.

What are the advantages of capital leases over bank financing? A capital lease, in effect, provides 100% financing conveniently, whereas a bank loan usually requires a 20%-25% down payment, plus more paperwork and application time. Capital leases are often arranged via a one-page credit application "in-house" through a reseller within 24 hours, whereas bank financing requires a visit to a bank, filling out a more complex loan application, providing financial statements, and longer processing time to comply with bank policies, financial disclosure rules, and FDIC regulations.

Another attraction of operating and capital leases is both leave customers' lines of credit free for the expenses of expansion. Bank lines of credit will be fully intact when or if the customer needs to tap the line for important strategic moves.

A few situations argue against leasing equipment:
(1) If the company has extensive cash reserves, and needs no tax or accounting advantages associated with leasing, or
(2) If the company intends to pay off the equipment lease in a few months. The short length of time makes leasing inefficient.

Choosing A Leasing Company

Are there differences among leasing vendors? Yes, there are. Choose a leasing company that has its own funds, not a broker who is at the mercy of the financing source. A leasing company with its own funding can be more flexible on terms and can offer more services because the company is not constrained by outside factors. Decisions are made quickly, with the authority in-house not based on policy or procedure in another company.