Lease Term – This is the total time of your lease. It is usually broken down into months, but can also be calculated as years for ease of discussion (e.g., a 36-month lease and a three-year lease are the same thing). 

The Lease Term will affect your monthly payment in the same way a finance term does – the longer the term, the lower the payment. But the lease term will also affect the ending residual value, which we’ll get to in a second…

Monthly Rent – Can you guess what this is? It’s your monthly payment. It’s sometimes called monthly rent because leasing is often seen as closer to renting equipment than buying it. There, that was simple!

Residual Value – This is the value of the equipment at the end of the lease term. This can either be a calculated value at the beginning of most leases (“assuming normal wear and tear, the equipment will be worth $XX at the end of three years”), or a value determined by the market (in a Fair Market Value lease, the residual value at lease end is, you guessed it, the fair market value.) 

In the case of the residual value being determined at lease inception, it will affect the monthly payment – essentially, you’re paying for the portion of the item’s full value you are using during your lease term. So the higher the residual value (percentage-wise) to the equipment’s overall value will result in a lower payment (this is also determined by lease term – all things equal, a two year old vehicle is worth more than a same model three year old one). 

The residual value is typically the price you can buy the equipment at after the lease is over (or use as the item’s value in a new lease.) 

Lease Rate – Similar to an equipment finance agreement, this is the rate you pay on your lease term. It’s calculated a little differently (instead of straight interest, it’s more a flat fee divided by the term, but it generally works out to similar amounts.) 

Lessee / Lessor – I debated putting these here because they seem a little basic. But you know what? Even I get them confused sometimes.  The Lessee is you, the person or company leasing the equipment. The Lessor is the one providing the lease, in this case, Crest Capital.   

The preceding are the basic terms you’ll run into with any lease agreement, and should get you by in understanding everything pretty well. 

The two accounting methods are: 

Book Accounting (which could simply be called “accounting”) utilizes Generally Accepted Accounting Principles (GAAP), whose rules are set by the Financial Accounting Standards Board (FASB). 

Tax Accounting relies on the Internal Revenue Code (IRC), and, as you may have guessed, is used  by the Internal Revenue Service (IRS).

So what’s the difference between book accounting and tax accounting? 

Book Accounting provides business owners and other interested parties (such as lenders) with accurate and detailed financial data, giving them a clear picture as to how the business is actually doing.  

Tax Accounting provides the IRS and other taxing authorities (such as States and municipalities) with taxable income and deductible expenses, which of course determines how much tax the business owes.

To be honest, the differences between the two are fairly small. But one key difference has a LOT to do with equipment and equipment financing (and leasing, which is what prompted this series in the first place). 

This difference is in how equipment and assets are viewed and depreciated.    

Under Book Accounting, the cost of any Equipment is depreciated/expensed over a period of time matching the Equipment’s useful life. This ‘Straight-Line’ method is the most common method used to calculate depreciation expense under GAAP. 

So basically, you buy equipment, and depreciate it a little each year depending on how long the equipment is supposed to reasonably last. 

Under Tax Accounting, the cost of Equipment is depreciated/expensed much quicker, which minimizes the immediate tax liability. Tax Accounting uses what’s called the Modified Accelerated Cost Recovery System (MACRS) method, which allows larger amounts expensed in the initial years.

In recent years, Section 179 and bonus depreciation are subtracted before computing MACRS deductions, allowing businesses to fully write-off the cost of equipment in the year it is obtained. Currently, the bonus depreciation is 100% thanks to 2017’s Tax Cut and Jobs Act, with no upper limit, so almost all equipment will fall under this. 

Real Quick: WHY?

People have asked “why are there two accounting methods”? The answer can be very intricate, but it can also be simple. Imagine you wanted to loan a business money. You want to make sure they are stable, with solid income. 

The following is general, but illustrate why both exist:

If you look at the business through a tax accounting lens, the business may seem to have low income, because of all the short-term high depreciation to save on taxes. Based on only that, you may not loan them money. 

But a look at them through book accounting shows the company’s true worth… you may have a fine loan candidate there. 

The finance guy in me knows it’s useful to understand the fundamental differences between the two accounting methods, which I hope I’ve accomplished for you in this post. 

I read something interesting the other day. There were the usual “brick and mortar retailers vs. online shopping” articles that crop up right around the holidays, but there was a different tone this year.

As reported by CNN Business, brick and mortar retailers fought back against online sellers using “buy online / pick up in store”. This pleased me to no end, because not only do I like brick and mortar stores and want to see them survive, it’s also an excellent primer for any business looking at slumping sales: if you look hard enough and get creative, you may find the answer in an asset you already have.

In this case, Brick and Mortar Retailers looked at themselves and said “hey, wait a minute – we have physical stores. Let’s try and use that to our advantage in a different way.” And they did, using their physical presence to circumvent the 2-3 day shipping time wait.

So how does this relate to equipment financing? Glad you asked.

Answer me two questions:

1. Does your company sell any kind of business equipment, vehicles, or software?
2. Does your company have a website?

If you answered “yes” to both questions, then there’s an incredibly powerful (yet really simple) tool that can increase your sales right now. And that’s offering equipment financing right on your website.

Crest Capital has made it really easy to do this (it can literally take less than five minutes). You need not get involved in approvals, payments, or anything like that. In fact, you get paid right away, just like always – the difference is, you make it much easier for your B2B customers to buy from you.

I’ve discussed equipment vendors offering financing to increase sales before in this blog, but it’s such a game changer for so many companies that I like to revisit it every so often. And reading that Brick and Mortar article made me think of it today – there are solutions to almost any business problem if you look hard enough, and sometimes, it’s using what you already have a little differently. In this case, your company website.

Have you ever financed or leased a car or truck? Most of you probably have – they are easily the most popular ways for many people to acquire vehicles these days. Let’s talk about the differences between the two in an overall sense.

When you finance a vehicle, somebody else loans you the full amount to “buy” the vehicle. Typically, the bank does this through an auto loan, but also many vehicle manufacturers have their own financing companies as well.

Either way, it’s the same – the dealership gets paid the full amount by the lender, and you pay the lender back, usually over a term of 4-7 years, with 5 years (60 months) being the most common. The lender keeps a lien against the vehicle (this is noted on the title). And when the term is over, you “own” the vehicle and the lien on the vehicle’s title is released.

With leasing, it’s a little different. You still make monthly payments to a leasing company, but the end goal is usually NOT to own the vehicle (at least on the consumer end – we’ll get to that in another post). What happens with a vehicle lease is you pay for the value of the vehicle that you use. So if you lease a new vehicle for three years, the dealership / leasing company will calculate what that vehicle will be worth, with normal wear and tear, three years from now. You make payments on the difference between today’s value, and the value three years from now, (when most consumers trade it in, and lease another car.)

The preceding is why there are mileage limits on leases – the leasing company needs to have a good idea what condition the car will come back in. They basically say “ok, return this in three years, with less than 36,000 miles, and assuming normal wear and tear, it’ll be worth $xyz”.

Technically, there is a buyout at the end of the lease, where you can own the vehicle if you really like it, but for most consumer vehicles, this doesn’t happen. The goal of leasing is to always have a “new” car every three years or so. Mrs. Fletch does this – she’s always driving a new leased car. Yes, we always have payments on her car, but we never have an 8 year-old clunker in the driveway (well, she doesn’t. Me on the other hand…)

Note the above is a broad based description of the two. And the above is also based on the consumer end of the spectrum – I’ll talk about equipment financing companies and leasing vehicles (financing too) in the next few posts. Maybe even some Section 179 stuff, too!