What finance options are available when leasing equipment?
There are several types of equipment lease structures to help secure the equipment you need to operate your business. The following are the most common types of equipment financing structures.
Fair Market Value Lease (True Lease)
The lessee (you, the customer) has the option to purchase the leased equipment at the end of the lease term for the fair market value (FMV) or you can return the equipment. Monthly payments are fixed and usually 100% tax deductible.
10% Purchase Option
The lessee (you, the customer) has the option to purchase the leased equipment at the end of the lease term for 10% of the original FMV or purchase price.
Buyout (Full Payout Lease)
The lessee (you, the customer) repays the lease obligation with a fixed monthly payment and takes ownership of the equipment at the end of the lease term with a dollar buyout.
Equipment Finance Agreement (EFA)
EFA is basically a loan against the equipment, offering you a fixed monthly payment that does not change monthly with the prime rate your bank lends against. You will own the equipment and our investor will release the security interest at the end of the finance term. Typically no blanket liens or compensating balances as required by most banks.
TRAC (Terminal Rental Adjustment Clause) Lease
TRAC is a tax oriented lease of titled motor vehicles or trailers that contains the fixed purchase amount (terminal rental adjustment clause) and otherwise complies with true lease requirements set forth by IRS rules. TRAC Leases are used for financing transactions containing only titled equipment and with residuals from 10-20%.
First Amendment Lease
Provides you a purchase option at one or more defined points in time with the requirement that you renew or continue the lease if the purchase option is not exercised. The option price is usually either a fixed price intended to approximate the fair market value or is defined as fair market value by appraisal and subject to a minimum price to insure that the lessor’s residual position will be covered if the purchase option is exercised.
If the purchase option is not exercised then the lease is automatically renewed for a fixed term (typically 12 or 24 months) at a fixed rental intended to approximate fair rental value, which will further reduce the lessor’s end of term residual position. You are not permitted to return the equipment on the option exercise date. If the lease is automatically renewed, then at the expiration of that initial renewal term, you will typically have the right to return the equipment without penalty, renew, or purchase at fair market value.
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