The Alphabet of Leasing

The Alphabet of Leasing

Equipment Leasing American Business Lending

2 | P a g e American Business Lending, 5332 S Memorial, Tulsa OK 74145 O:(918) 941-5959 www.AmericanBusinessLending.com

Over 80% of the companies in the United States lease all or at least part of their

equipment. We believe that it is essential for our clients to understand both the

benefits and disadvantages of leasing in order to see if it’s an option that can serve

their business. We have put together this E-book to remind and educate our clients

about the basics of leasing equipment. We hope that you will find it beneficial in

expanding your knowledge about the leasing industry.

Please feel free to contact us if you have any questions about how leasing equipment

can benefit your company.

American Business Lending 5332 S Memorial Tulsa, OK 74145 O: 918-641-5959 F: 918-664-7300 [email protected] www.AmericanBusinessLending.com

We look forward to hearing from you and we are ready to work hard to serve your business.

Contents Benefits of Leasing Equipment ..................................................................................................................... 3

Disadvantages of Leasing Equipment ........................................................................................................... 5

Lease vs. Loan Case Study ............................................................................................................................. 7

Leasing Terminology ..................................................................................................................................... 9

Types of Leases ........................................................................................................................................... 15

Leasing FAQ ................................................................................................................................................. 17

What We Do ................................................................................................................................................ 22

mailto:[email protected]

http://www.americanbusinesslending.com/


Benefits of Leasing Equipment

TAX SAVINGS A lease is considered as a rental of equipment used for the business operation and generally 100% tax deductible. The IRS does not consider an operating lease to be a purchase, but rather a tax-deductible overhead expense. Therefore, you can deduct the lease payments from your corporate income.

CONSERVATION OF CAPITAL Leasing eliminates large cash outlays, leaving your lines of credit open for short term requirements or other, more profitable purposes.

100% FINANCING = BETTER CASH FLOW A Lease does not require a down payment. Additional expenses such as delivery, installation charges, freight or sales tax may be included in the lease. Rental payments can be timed to coincide with the availability of cash.

FAST AND FLEXIBLE After receipt of a completed application, we can give you an initial approval within 24 hours. You chose from who or where you buy the item needed for your business.

OBSOLESCENCE You minimize the risk of obsolete equipment, because you don't own it. You will be flexible to upgrade with new items available on the market. However, it will be your choice to buy the leased goods at the end of the lease for a minimum dollar amount, or replace it with new equipment on a new lease.

DIFFERENT LEASE TERMS Regular payment schedules from one to six years. Payments can be specially designed for you in monthly, quarterly, semi-annual, annual or skip payment programs.

SIMPLIFY ACCOUNTING A minimal bookkeeping effort will add your Lease Payment to your monthly cost of operation. Time consuming depreciation schedules are not needed.


Balance sheet management: Because an operating lease is not considered a long-term debt or liability, it does not appear as debt on your financial statement, thus making you more attractive to traditional lenders when you need them.

FIXED AND LOW MONTHLY PAYMENTS Lease Payments are fixed and not variable like bank payments. Therefore they are protected from inflation.


Disadvantages of Leasing Equipment

EARLY TERMINATION The terms for early termination of most leases can be very unpleasant for the consumer, particularly if the termination is forced, i.e., the car is totaled in an accident or stolen. In such cases, insurance pay-outs often fall far short of the balance due on the lease leaving you holding the bag. Many leasing companies will offer "gap insurance" for only a few dollars a month extra which is a wise investment.

There is a very good reason why it is so expensive to get out of a lease. Consider that your monthly payment is made up of two parts: depreciation and interest. The depreciation part of the payment is calculated by taking the difference between the cap cost and the residual (the total depreciation over the lease) and dividing it by the number of months. In effect, you are paying off the depreciation with equal payments each month. Graphically, the depreciation is being paid "in a straight line" (see figure).

But we all know that a car depreciates much more rapidly in the earlier years with the biggest hit occurring the day you drive the car off the lot. So when you terminate the lease before you have paid all of the depreciation, you will likely be


required to pay the difference between what the car is worth and how much you have paid on the depreciation. This difference is often referred to as the "gap".

Some lease contracts will really stack the deck against you with the terms for early termination. For example, some Nissan Motors leases require the sum of all remaining payments be made before they will release you from the lease. Other leasing companies tack on an additional early termination fee of $250 to $450 in addition to unpaid depreciation. Always read the fine print of the lease contract and understand your exact liabilities for early termination before you sign.

MILEAGE LIMITATIONS Almost all leases limit the number of miles per year by imposing fees typically 10 to 15 cents per mile over 15,000 miles per year. If you put a lot of miles on a car, these fees can add up quickly.

NO OWNERSHIP Technically, when you lease a car, you are renting it. The leasing company retains ownership of the car and you pay for the privilege of driving (and maintaining) it. For many who have "owned" cars all their lives, this may be a psychological barrier.


Lease vs. Loan Case Study

Loan: A loan requires the end user to invest a down payment in the equipment. The loan finances the remaining amount. Lease: A lease requires no down payment and finances only the value of the equipment expected to be depleted during the lease term. The lessee usually has an option to buy the equipment for its remaining value at lease end. Loan: A loan usually requires the borrower to pledge other assets for collateral. Lease: The leased equipment itself is usually all that is needed to secure a lease transaction. Loan: A loan usually requires two expenditures during the first payment period; a down payment at the beginning and a loan payment at the end. Lease: A lease requires only a lease payment at the beginning of the first payment period which is usually much lower than the down payment. Loan: The end user bears all the risk of equipment devaluation because of new technology. Lease: The end user transfers all risk of obsolescence to the lessors as there is no obligations to own equipment at the end of the lease. Loan: End users may claim tax deduction for a portion of the loan payment as interest and for depreciation which is tied to IRS depreciation schedules. Lease: When leases are structured as true leases, the end user may claim the entire lease payment as a tax deduction. The equipment write-off is tied to the lease term, which can be shorter than IRS depreciation schedules, resulting in larger tax deductions each year. The deduction is also the same every year, which simplifies budgeting

Loan: Financial Accounting Standards require owned equipment to appear as an asset with a corresponding liability on the balance sheet. Lease: Leased assets are expensed when the lease is an operating lease. Such assets do not appear on the balance sheet, which can improve financial ratios.


Loan: A larger portion of the financial obligation is paid in today's more expensive dollars. Lease: More of the cash flow, especially the option to purchase the equipment, occurs later in the lease term when inflation makes dollars cheaper.


Leasing Terminology

"Application Only" Program:

A streamlined credit application and review procedure that only requires the

submission of a single page application with basic information about the business'

principals, bank and trade references. This type of program does not require

financial statements, tax returns, business plans or other more detailed

disclosures.

Big Ticket (Large Ticket):

A market segment, where the equipment financed is over $5 million.

Cash Flow: Cash flow is a critical measure of a businesses' ability to meet Lease obligations. Cash flow is calculated by adding the businesses' "Net Income" to its "Depreciation Expense" for a particular period (i.e. Month, Quarter, Year), and subtracting the "Current Portion of Long Term Debt". The remainder of this formulation is the available cash to "service" new lease obligations. Certificate Of Acceptance (Delivery and Acceptance): A document whereby the lessee acknowledges that the equipment to be leased has been delivered, is acceptable, and has been manufactured or constructed according to specifications.

Closed End Lease: A closed-end, or "walk-away" lease is usually structured on a net-lease basis. At the end of the lease the property reverts back to the lessor. Ownership possibilities are "closed" to the lessee. Default: If a lessee does not comply with the terms of the lease, a default occurs. Generally, after a default, the lessor can exercise all of its rights under the lease to repossess the property and seek money damages.


Documentation Fee: A fee charged for preparing, distributing and storing transaction documents in any finance transaction. Fair Market Value (FMV) Lease: Provides greater flexibility and lower monthly payments than the Finance Lease format. Key benefits include a number pre-set end-of-lease options: Return the equipment with no further obligation, or Purchase the equipment for its fair market value, or Re-lease the equipment for its fair market value, or Continue leasing on a month-to-month basis The FMV lease also qualifies as a tax deductible operating expenses.

Finance Lease (Capital Lease):

The same as a Full Payout Lease. A lease used to finance the purchase of

equipment, not a true lease. The lessee is responsible for the total cost of the

equipment including maintenance, taxes and insurance. Finance Leases are

generally considered to be capital leases from an accounting stand point and non-

tax leases from a tax stand point.

Financial Statements:

Accounting statements that provide specific information about a company's financial position.

They include the Profit & Loss Statement, also know as the Income Statement, the

Balance Sheet, and the Statement of Cash Flows. Financial statements can

generally be audited by an outside CPA firm or be unaudited and, thus, prepared

by the company.

Early Termination Fee:

If for some reason you are compelled to break the lease, you will almost certainly

be obligated to pay this fee. Depending on the wording of the lease agreement,

this fee could be very substantial. Therefore, you should be sure to understand

the terms under which the lease may be broken before you sign the contract.

Finance Lease ($1 Buyout, Capital Lease or Bargain Purchase Lease):


These 4 terms describe leases that combine lower, fixed monthly payments with

the guaranteed-in-advance right to purchase the equipment at the conclusion of

the lease term at a pre-determined price. These leases generally do not qualify as

deductible operating expense and must be amortized and depreciated. There

are, however, some significant other tax benefits under I.R.S. section 179, that

may be available to your business.

Guaranty,(Personal/Corporate/Other):

At times, business Owners (especially in the case of Proprietorships, Partnerships,

closely-held Corporations, or Small Businesses), may be required to personally

guarantee a leasing transaction. In these cases, the appropriate party(s) will

acknowledge his or her Guarantee on a separate Guaranty form, or in a separate

Guaranty section of the Lease Agreement itself. At other times, a business may be

a subsidiary of, or owned wholly or in part by, another business. Depending on

the circumstances, the Lessee's "Parent" may be required to guarantee a Leasing

transaction.

Insurance:

Because leased equipment is technically owned by the lessor until the satisfactory

conclusion of the lease term, (proof of) all risk/casualty insurance will be required

showing the lessor as a "named insured."

Lessee: The entity that is leasing the equipment from its owner, the lessor. Lessor: The owner of the equipment to whom lease payments are made. Middle Market: A market segment usually represented by financing amounts of $250,000 to $5 million. Middle Market Companies: Companies with annual revenues of $25 Million to $500 Million.


Off-Balance Sheet Financing:

Unlike the traditional methods of financing, operating lease obligations are not

capitalized, thus improving balance sheet ratios. Leases are generally footnoted.

Open-end Lease:

Generally a net-lease where the title to the asset passes to the lessee when

exercising a purchase option or payment of a residual. Ownership possibilities are

"open" to the lessee

Pre-Funding:

Some vendors require they be paid at least 50% of the invoice cost before proving

the equipment to the lessee.

Progress Payments (Vendor Pre-Funding):

A special kind of lease for vendors who require up to 100% of the selling price

prior to delivery. (Most leases are designed to fund your equipment vendors

immediately after you confirm that the equipment that you ordered has been

received in satisfactory order.) Some vendors, however, require that specially

ordered, configured or manufactured-to-order equipment be paid for in stages

ranging from small up front, order-confirmation deposits, to multiple "progress

payments" as the order gets closer to shipping to full-prepayments. American

Business Lending can accommodate almost any equipment vendor's pre-payment

requirement.

PUT Option:

(Purchase Upon Termination). A specialized option, that can be offered in

conjunction with an FMV lease that requires a purchase of the equipment at the

conclusion of the lease at a fixed-in-advance percentage of the original purchase

price (e.g. 10%).


Renewal Option:

An option to a lessee to renew the lease term for a specified rental time and

period.

Residual Value:

The remaining (market) value of the equipment at the end of the lease term.

Sale Lease Back:

A technique for re-capturing cash previously expended on equipment by selling

that equipment to the lease company who in turn leases that same equipment

back to the company over a period of 12 to 60 (or more) months.

Security Deposit:

An amount paid at the beginning of the lease that is held by the lessor until the

satisfactory payment of all amounts due under the lease terms, at which time the

security deposit amount is returned to the lessee.

Small-Ticket Leasing:

Transaction under $100,000 typically using single investor true leases.

Tax Exempt Entity:

Generally, any local, state or federal government that is exempt from paying sales

tax.

Term:

The length of time a lease agreement will remain in force. The rules of an

agreement as supplied on a rental or lease contract between the customer

(lessee) and the lessor. The terms of the contract will govern such things as the

length of the agreement, rules of proper cancellation of the agreement, renewal

terms, and charges for breach of the contract.


Uniform Commercial Code Financing Statements (UCC1):

Standardized UCC1 forms are commonly used by Lessors to secure their

ownership of leased equipment. UCC1's are filed with the Secretary of State's

office, (and in some cases the County Clerk's office), of the State (and County, if

applicable) where leased equipment is located. The purpose of filing these forms

is to notify other parties who may seek a security or other interest in the specific

equipment, that a particular party currently has a secured interest in the

identified equipment.

Use Tax:

A state and county tax based on the monthly rental payment and the tax rate

applicable where the equipment is located. The tax is collected monthly up to the

maximums and forwarded to the appropriate Department of Revenue, Sales and

Use Tax Division.

Working Capital:

In (basic) accounting/financial terms working capital is defined as current assets-

current liabilities. It is one measure of a business' "ready cash." Leasing

conserves working capital by allowing a business to better match (time) its

expenses for the acquisition of equipment to the revenue generated by that that

equipment generates.


Types of Leases

Operating Lease:

An operating lease is particularly attractive to companies that continually update or replace equipment. They want to use equipment without ownership, but also want to return equipment at lease-end and avoid technological obsolescence. An operating lease usually results in the lowest payment of any financing alternative and is an excellent strategy for bypassing capital budgeting restraints. It is typically qualifies for off-balance sheet treatment and can result in improved Return On Asset (ROA) due to a lower asset base. It can also result in higher reported earnings in the early years of the lease.

Finance Lease:

A finance lease is a full-payout, non-cancelable agreement, in which the lessee is responsible for maintenance, taxes and insurance. Finance leases are most attractive in cases where the lessee wants the tax benefits of ownership or expects the equipment's residual value to be high. These leases are structured as equipment financing agreements with residuals up to 10 percent. The lessee purchases the equipment upon lease termination at a pre-agreed amount. The term of a finance lease tends to be longer, nearly covering the useful life of the equipment.

Capital Lease: Type of lease classified and accounted for by a lessee as a purchase and by the lessor as a sale or financing, if it meets any one of the following criteria: (a) the lessor transfers ownership to the lessee at the end of the lease term; (b) the lease contains an option to purchase the asset at a bargain price; (c) the lease term is equal to 75 percent or more of the estimated economic life of the property (exceptions for used property leased toward the end of its useful life); or (d) the present value of minimum lease rental payments is


equal to 90 percent or more of the fair market value of the leased asset less related investment tax credits retained by the lessor. Sales-type Lease: A lease by a lessor who is the manufacturer or dealer, in which the lease meets the definitional criteria of a capital lease or direct financing lease. Tax Lease: A lease wherein the lessor recognizes the tax incentives provided by the tax laws for investment and ownership of equipment. Generally, the lease rate factor on tax leases is reduced to reflect the lessor's recognition of this tax incentive. Trac Lease: A tax-oriented lease of motor vehicles or trailers that contains a terminal rental adjustment clause and otherwise complies with the requirements of the tax laws. True Lease: A type of transaction that qualifies as a lease under the Internal Revenue Code. It allows the lessor to claim ownership and the lessee to claim rental payments as tax deductions.


Leasing FAQ

What is the interest rate in a lease? ‘Lease Rates’ or ‘Lease Rate Factors’ are different from bank interest rates. Since you are leasing and not taking out a bank loan to finance your purchase, there is no interest rate. With leasing, you are paying to rent the equipment and the fixed monthly payment is based on the type of lease, term of the lease, cost of the equipment, time in business, financial repayment ability and your business and personal credit history.

How long does it take to get approved? Most completed Applications are approved within 24 - 48 hours.

Does is cost anything to apply for a lease? No. If you are asked by a leasing company to pay a significant, non-refundable fee upfront to see if you qualify for a lease – kindly hang up the phone.

What is a lease? A lease is an agreement by you the customer (the lessee) to pay a fixed monthly rental payment for a specific amount of time for the right to use rental property owned by the lease company (the lessor). The customer is responsible for insurance, maintenance, and all other costs of ownership.

What is the difference between a lease and a loan? A lease is an agreement to make payments for a specific amount of time for the right to use the equipment owned by the lease company.

What is the minimum equipment cost that can be leased? Our minimum is $500 with no upper limit.

What happens at the end of the lease term? That depends on the lease structure you have chosen. The majority of the leases we originate have clear end of term options. For transactions structured with a Fair Market Value purchase option, the buyout will be the fair market value of the equipment at lease end.


May I end my lease early? Typically, NO. Most lease investment companies will require you to pay the total of the remaining lease payments. However, some will work with you and discount your remaining payments so you can get out early.

What are my options at the end of the lease? The lessee/end user may purchase the equipment for its then fair market value (or such other amount if previously agreed to in writing), continue to lease the equipment, or return the equipment.

May the equipment be returned at any time? No. The lease is a non-cancelable agreement for a specified term. Leases on commercial equipment are available for terms ranging from 12 to 84 months depending on equipment cost and type.

Are lease payments tax deductible? Typically, on a Fair Market Value lease option, the IRS will allow you to write 100% of the lease payments off as an operating expense. We recommended that you consult with your tax advisor for the specific application to your business.

Are lease rates fixed or variable? Lease rate factors & terms are fixed.

Can equipment be added to a lease at a later date? Yes. Equipment add-on programs are available throughout the term of the lease.

Can I finance 100% of the purchase price? Yes. Leasing only requires your first & last payment due at lease signing. Banks typically require 10-30% down.

Can installation & service costs be added to a lease? Yes. Installation and service fees can typically be included in the lease as well as the maintenance contract.

Do I need to have insurance on lease equipment? Yes. Insurance is required on all leased equipment. Insurance protection can sometimes be included with your lease for a nominal fee.


Do I save money on taxes with a lease? Yes. Lease payments come from pre-tax dollars, not your after-tax profits. Tax-structured leases may allow you to write off the equipment at a faster rate. We advise you speak with your accountant for specific guidelines.

Does the equipment have to be new to be leased? No! We can lease finance new & used equipment, but prefer assets 10 years old or newer.

How do I apply for a lease? Go to our Application Page (www.AmericanBusinessLending.com)& follow our simple and easy approval process.

How does a lease qualify as an Operating Lease? - Title to the leased assets may not automatically transfer to the lessee at any time during the lease term or subsequent to the lease term. - There is no provision for a bargain purchase option. - The lease is non-cancellable for its term and that term is less than 75% of the economic life of the leased asset. - The present value of the total or minimum required lease payments when discounted at the implicit interest rate in the lease is less than 90% of the leased asset's fair market value at inception.

How does inflation affect leasing? Leasing lessens the impact of inflation, because your lease payments remain the same, no matter what happens to the value of the dollar.

How is my monthly payment calculated? The monthly lease payment is determined by a Lease Rate Factor: a periodic rental payment to a lessor for the use of the asset. The Lease Rate Factor multiplied by the equipment cost determines the monthly lease payment.

How much of an initial investment is required? Typically, two monthly payments, the first and the last months are required upon signing the lease agreement.


Who do I contact if I have questions during the term of my lease? A leasing agent is always available during regular business hours by phone, fax or email.

What kinds of equipment can be leased? We can finance most types of capital equipment, new or used, provided it qualifies as either revenue generating, essential use or cost saving in nature.

When does the lease start? The lease starts when we receive acknowledgement that the equipment you ordered has been received by you and is in good working order.

Who can lease equipment? Any company, organization or association and all municipal, state and government agencies can apply for leasing. We do not lease equipment to an individual for personal use.

Where do you geographically lease equipment? We can finance equipment throughout the USA, all 50 states. On occasion we can offer international clients financing.

Who is responsible for filing personal property tax returns and the annual payment of the tax? The Lessee/end user is responsible for filing all property tax returns and remitting payment to the proper taxing authority. We will forward any property tax bills to the Lessee immediately upon receipt.

Who is responsible for the insurance and maintenance of the equipment? The Lessee/end user is responsible for maintaining the equipment and providing the proper insurance. The lessee is responsible for insuring the equipment against risk of loss including property and casualty coverage and liability. Lessees typically just add the equipment to their existing policy, however, insurance may also be available through the lessor.

Who owns the leased equipment? The Leasing Company, as the lessor, is the owner of the leased equipment until you choose to purchase the equipment at the end of the lease term.


Who services and maintains the equipment? The lessee (equipment user) receives the benefit of the “buyer” warranties. The vendor or the original supplier of the equipment is solely responsible for any service or warranty issues. The cost of service contracts can typically be added to the lease.

Why should I lease versus pay cash for the equipment? Suppose you take the cash you would use to purchase the equipment and re-invest it in your business. You could use it to advertise, purchase inventory, train or hire employees. Your return on investment would probably be around 20-25%. Is purchasing the equipment smart money management? Leasing saves after tax dollars and will not affect your Alternative Minimum Tax position with the IRS.

Why do you need my personal guarantee? We know that you will be in business five years from now. By signing this industry standard personal guarantee you will be telling us you feel the same way. You will not be doing anything you have not been doing every day - committing yourself personally to support a business entity that you have built personally.

Will you finance the installation of my new equipment? Yes. Installation and freight charges, as well as taxes, can be included into your lease and amortized over its life.

May non-equipment items such as software and maintenance be included? Yes. One of the benefits of leasing is the ability to bundle a number of corporate equipment items into a lease including software, service and support costs. This allows a lessee to make one simple monthly payment for an entire system or equipment line.

Where can I learn more about certain leasing terms that I don’t understand? Click on our Equipment Leasing Terms page to find definitions for the most common terms used in leasing.


What We Do

We have positioned ourselves to serve our clients in ALL industries. We offer

creative financial solutions to companies seeking finances for expansion,

renovation, working capital, and simply growth.

We have the following programs:

-equipment leasing -commercial real estate -business credit lines -A/R factoring -merchant processing

Please give us a call for a FREE consultation about your business idea/need. We

work with start-up companies and we can finance equipment purchases

anywhere from $5,000 to 5MIL. If we believe that your idea is sufficient, we will

find a way to finance it.

We understand that the recent economic recession hurt many small businesses;

hence we have programs that deal with clients who have not-so-perfect credit.

We look at creative solutions, many times involving collateral to underweight the

extra risk. We approve deals, others do not.

Look forward to hearing from you.

American Business Lending

Email or Call Us:

[email protected] or (918) 641-5959

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The Alphabet of Leasing

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