For the next few posts, I’d like to go over some of the finer aspects of equipment leasing, and what some of the language means. Things like lease contract wording and phrase definitions (lease term, residual value, monthly rent, etc.), how the residual value and terms affect payment amounts, wear and tear conditions, the importance of having insurance, renewal options (aka, what happens at the end of the lease), and perhaps a few more. It’ll take a bunch of posts. 

One of the reasons I wanted to do this series is the terms and phrasing can be a little confusing to people not in the lending industry. I had a customer ask about “monthly rent” recently, because that’s what the lease agreement said. He jokingly said “what, am I getting an apartment from you too?” I had to laugh because he’s right – we generally associate that phrase with housing, not equipment. But it’s there, and it does have meaning (I’ll address monthly rent and other terms next post). 

Note that we’ll be generally talking about Operating Leases here, which are off-balance sheet leases where you don’t actually own the equipment. There are other types of leases available, but they are closer to finance agreements than a true off-balance sheet lease (for example, on a $1 buyout lease, you actually own the equipment from day one.) To help you sort these out, you can look over all our equipment lease and loan agreements here. 

I hope you enjoy this series, and that it answers a few questions that may have been in the back of your mind. At the least, after reading the next few posts, you’ll know more about leasing than most people – stay tuned!

People ask me all the time “what is the best type of payment structure for my business, leasing or financing?” And I always answer with another question: “what is your company goal in wanting this transaction?” 

Here are the most common scenarios/answers, and the general type of payment structure that works best:

“I Want Monthly Payments and to Use Section 179”

This is far and away the most common answer – the company wants to buy equipment now, and for budgetary/cash-flow reasons, wishes to make monthly payments instead of paying cash up front. In this case, a straight equipment financing agreement (EFA) will suffice nicely. 

In this scenario, the equipment is on the balance sheet as an asset, as the borrowing company is the owner of the equipment (with the lender holding a lien until the loan is paid off), and a full Section 179 deduction can be taken right away.

Now, certain leases also accomplish “monthly payments and Section 179” but they are usually only employed at the lender’s discretion – maybe the lender only writes leases for some reason and sees no reason to change. 

So yes, wanting monthly payments = EFA. Simple, effective, and good for small to mid-sized companies because it allows for a full Section 179 Deduction.

I Do Not Want the Equipment on My Balance Sheet 

Ok, NOW we’re getting into another area. In this case, an EFA (or something like a $1 / 10% purchase option lease) will NOT do. You would need an Operating Lease. 

In an accounting sense, this views the equipment as an expense, and not an asset. The lease payments for Operating Leases are usually tax-deductible expenses, but a Section 179 deduction is not possible (because the lessor/borrower does not own the equipment).  

It’s usually larger companies that want this, as the off-balance sheet/expense aspects are attractive (to give one example why, many companies do not need board approval for expenses, but do for capital expenditures, making leasing an efficient way to acquire needed equipment).  

I Always Want New-ish Equipment Without Maintenance Costs

This is another popular scenario that a FMV Lease works well for. Perhaps a company relies on equipment where “the latest and greatest” gives them a competitive advantage. Or the equipment is such that they’d rather not deal with age-related maintenance issues. 

For equipment like this, the company would rather they never actually “own it”, instead choosing to lease it for several years, turn it in, and then lease a new one.

In this scenario, the company always has a monthly payment, but since they always have a “new” model, maintenance costs are likely reduced, and they always have the latest features. Consumers do this with automobiles all the time.

Wrapping Up

Ok, there are some of the main reasons a company would want a monthly payment option. As you can see, the reasons vary wildly (from simple “monthly payments make sense to our budget” to more complicated off-balance-sheet needs), but regardless of the reason, there is a finance/lease structure that can satisfy it. 

In fact, take a look at Crest Capital’s different lease and loan offerings with explanations.

Of course, none of the above is to be considered definitive tax or business advice. Consult your accountant for further information.  

As we navigate through what is proving to be an extremely “different” business environment, I am reminded of a local planning board meeting I attended a few years ago.

Under discussion was a recent blight of failed businesses, and some empty buildings on the town’s main retail strip. The conversation turned to “what are people going to think when they see these empty buildings?”

Most answers were pessimistic. “Failure”, “Blight”, “Downtrodden”, etc. But the voice I really remember came from the back of the room. An enterprising young man, in a confident manner, said “opportunity”.

And he was right. With just a small marketing push from the town, within a year, every empty building was filled with a new business. Most of them are still in business today. And the ones that didn’t make it got filled with new owners again.

I see the exact same thing now. From my seat at the equipment financing end of the business table, I am seeing some industries shrink, but I am seeing others rise, and take advantage of the opportunities presented. For example, we just got a call from a corporate training company who needs more AV equipment. Why? Because they are expanding their workshops to include greatly expanded work at home training for both employees and executives. 

On the other side of the coin, I’m sure there’s a corporate training service out there who is scared, because big offices might not be as prevalent in the future. Same situation, different outlook.

Listen, this isn’t meant to be a feel-good “keep your chin up” post. Not every bad situation can be changed by changing your outlook. But I am saying there is always boundless opportunity. The companies who consistently look for these things are the ones who survive. 

I’ve known construction companies who financed new machines right after a disaster, and were first in line when the rebuild started, because they were ready. I already mentioned in another post about the dry cleaner who went after hospitals and first responders. These things are real, and they happen every day.

Opportunity is always knocking, folks. Sometimes the knock is soft, and sometimes it’s deafening. But it’s always there.

So now, I will ask once again in this blog: if you sell any kind of business equipment, are you offering a monthly payment option? Because right now, it matters more than ever. 

The ongoing COVID-19 pandemic has affected countless companies. But many of them are still operating, and still need the equipment you sell. And right now, they want monthly payments. And I feel that will continue long after this is over as well. Here’s why:

Toilet Paper and Money in the Bank – Same Thing

Let me ask you a quick question – when this is all over, will you EVER be without a few extra rolls of toilet paper in your home? I doubt it. 

For companies, when this is all over, you can bet they are going to be a little more reluctant to part with cash. We’ve all seen how fragile “things” truly are. Companies that didn’t embrace monthly payments in the past are changing their tune – they’d rather keep their cash and use borrowed money for equipment. 

So right now is an ideal time for equipment sellers to make sure they are offering financing. 

Now here are the no-brainer aspects:

• Offering financing costs you nothing. NOTHING.
• You take no risk – you still get paid in full right away. WE take the risk.
• There’s no work involved. Adding financing to your website takes mere minutes.

Nothing changes for you except your customers can now get easy, fast financing (at great rates and terms) at the click of a button. The bottom line is, you’ll sell more. I’ve seen it happen thousands of times. It gives you an advantage right now, and gives you a big one once this is all over and things start moving again.

If your sales have fallen, and you’re still scoffing at offering financing, I don’t know what to tell you. It’s like refusing a life preserver when you’re drowning. Or toilet paper in a quarantine! 

No cost. No risk. No work. No excuses. 

Visit https://vendorprograms.crestcapital.com and we’ll get you started.

Essentially, the 10% purchase option lease is similar to the $1 buyout lease we discussed last time (this post will answer a common question I get: “what’s the difference between a $1 buyout lease and a 10% purchase option lease”, to which I always jokingly answer “about 9.9%”… I’m aware that answer really makes no mathematical sense, but it also gets a chuckle at the party.)

But truthfully, the difference is really just a simple matter of the payout at the end to own the equipment. As we learned last post, a $1 buyout lease is used when a company wants to lease an item, but also wants to eventually own it. This keeps the equipment off the company’s books as they pay for it, which makes the accountant happy.

So in a 10% purchase option lease, the same exact thing applies, except at the end of the term, the lessee has the option of a purchase that is 10% of the item’s original value (which was determined at the beginning of the lease.) This means the part of the price that lease payments are based on is smaller, making the monthly payment lower.

To illustrate this, let’s pretend an item worth $100 is being leased for ten months ($100 being a nice, easy number for our example, and 10 months is a nice easy number to divide into it).

• $1 buyout = $99 leased + $1 buyout at the end. Payments are based on $99 – this works out to $9.90 a month.

• 10% purchase option = $90 leased + $10 buyout at the end. Payments are based on $90 – this works out to $9 a month.

(Obviously, I’m leaving interest / fees off of these. No sense making it more complicated to show you the difference.)

But as you can see, in any equal term length, the monthly payment will be lower on the 10% purchase option lease. And that’s usually the reason a company would choose a 10% purchase option lease over a $1 buyout. You’re deferring more money to the end of the term, and keeping today’s payments smaller. This can really add up if you are leasing items worth thousands / hundreds of thousands.

The other reason is the 10% purchase is an option, and if the numbers / item / business direction don’t favor ownership, the company can walk away from the equipment without paying that last 10% (which again, could be a good sized number.)

Next, we’ll talk about Fair Market Value (FMV) leases.