What is a Lease?
A lease is a financial transaction that can
permit you to conserve cash. A lease agreement rents the asset over a
specific period at a fixed payment amount
which is reflected in the agreement. This
permits the acquisition of required
asset while avoiding the outlay of cash.
WhO
Leases Equipment?
Eighty percent of companies in America
lease all or some of their equipment
acquisitions. Each year more companies,
particularly small ones, choose to acquire new
equipment through leases rather than loans.
 Why lease versus purchase?
There are several advantages to leasing an asset versus obtaining a loan and/or purchasing an asset outright.
Following is a list of some of these:
....read
our Lease v/s Loan section
Reduced cost:
A Lease offers you a fixed payment structure that
can better fit your budget - compared with variable rate financing that
can be unpredictable over the term of the loan. You
secure use of the equipment you
require at today's rates versus a potentially future
escalated rate. Your payments can be tailored
toward the use of the asset and not it's ownership, thus your cash is leveraged
to support working capital requirements.
100% financing:
There is no down payment required with 100% financing. This makes cash available for use in
other areas of your business permitting a more focused
approach toward growth. This permits you to leverage
the use of the product/services leased to generate
revenue and additional cash flow during the lease
term.
Credit Preservation:
Your existing lines of credit are unutilized
which preserves your borrowing capacity. Leases can
also be structured without any restrictive covenants.
Off-balance sheet financing:
Your company's financial ratios - such as ROE (Return on
Equity) and ROA (Return on
Assets) - look more
attractive when you lease versus borrow.
Tax advantages:
Your lease payments can be structured such they are
considered an operating expense,
which could permit you payments to be totally tax
deductible. Through
equipment leasing you can avoid the alternative minimum tax trap caused by paying cash for equipment, using accelerated depreciation
to optimize your tax benefit.
Both Flexible & Convenient: A broad range of services can be covered under lease, such as service/maintenance contracts, insurance, freight, installation, training, and taxes. Leases can be structured creatively to meet your specific
business and financial needs.
types
of Leases
There are many types of leases and various descriptions of them, some of which are/aren't recognizable and utilized on a day-to-day basis. Below outlines the most common leases you're likely to encounter:
Capital Lease
-
A capital lease is used when you desire equipment costs that are fixed at end of the
lease (typically a $1 purchase option). Capital leases must be disclosed as an asset and related obligation on your balance sheet. From a financial reporting perspective a capital lease has the characteristics of a purchase agreement and usually does not offer favourable financial statement ratio's
for the purpose of seeking bank credit lines versus a
True Lease.
Commercial Lease
- A lease transaction for business or commercial purposes.
Consumer Lease
- A lease transaction for personal, family or household purposes.
Matrix does not offer consumer leases.
Finance Lease
- A general term applied to most types of equipment leases. Typically a finance lease is a full-payout, non-cancellable agreement
with the lessee is responsible for maintenance, taxes, and insurance.
Gross Lease
- A transaction which a lessee would be liable for insurance, property taxes, maintenance expenses.
Net Lease
- A transaction where
instalments remitted to the
lessor excludes insurance,
taxes and maintenance. These
are paid separately by the lessee.
Maintenance Lease
- A transaction where leasee has an obligation to maintain the equipment in good functional and working order.
Operating Lease
-
For accounting purposes, an operating lease is any lease
which is not a capital lease; thus it is not required to be reflected on the lessee's balance sheet. These have the characteristics of a usage (rental) agreement and are typically
applied short-term leases of equipment. Lessee
may acquire the use of equipment for just a fraction of the assets useful life.
Service Lease
- Lessor provides complete service, maintenance, and care for the leased equipment.
True Lease
- Permits Lessee to expense lease payments, thereby reducing tax liability. Companies may use a True Lease when acquiring the use of equipment under an operating budget or when looking to limit alternative minimum tax liability or simply to minimize it's tax liability. True Lease is also typically accounted for "off balance sheet" in your financial statement. Should Lessee choose to purchase the equipment at the end of a lease, they may capitalize the purchase and take further deductions.
cash
flow considerations
A Standard Lease typically requires the first and last payment up-front and then a level monthly payment for the term of the lease. Terms may range from 24 to 60 months.
A Step Up Lease is typically utilized for higher priced equipment (over $75,000). Payments can start low, then "step up" to a normal payment. This permits the lessee to acquire the equipment and put it into production without significantly impacting cash flow
initially.
Skip Payment is an option for seasonal businesses. A lessee agrees to a schedule that requires payments only on certain months of the year. This permits cash flow to correspond with the payment schedule.
Deferred payment
can be used for businesses acquiring income-producing equipment. With the deferred payment program, a lessee has 90 days to utilize the equipment before the second payment becomes due.
End of Lease
Options
Fair Market Value:
One option is to purchase the equipment for its fair market value at the end of a lease term. Fair Market Value Leases are appropriate should you anticipate the value of the equipment to decrease at an accelerated rate over the terms or should you
anticipate the need to update / replace the equipment at the end of the lease
term.
Fixed Purchase Options:
Fixed purchase options are appropriate if you prefer the flexibility of a FMV lease and wish to cap the equipment buyout at a certain percentage of the equipment value. Common buyout options are 10-20% of original cost.
$1.00 Buyout: This option permits purchase of the equipment for $1.00 at the end of the lease.
This permits the lease to be treated similar to a conditional sales contract. A $1.00 Buyout can be advantageous if you expect the equipment to retain its value over the life of the lease and you expect to retain use of the
equipment thereafter.
|
