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. 

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!

When the clock strikes midnight on 12/31/2019, that’s it – Section 179 for 2019 is done. Over. Finished. 

And you don’t want to miss it. Trust me on this – here’s why:

The US Government has given small and medium businesses a HUGE gift with Section 179. It allows you to deduct the entire purchase price of almost all equipment purchases, up to a million dollars.

In other words, if you buy a new machine, or a delivery truck, or almost anything else used in business, you can deduct the entire cost from your 2019 taxes. Depending upon your tax rate, that’s like getting an instant 25%-35% discount on your purchase. That’s sweet. Want to see how much you can save? Check out this Section 179 Calculator.

Section 179 Financing Makes it Even Sweeter

Even better is when you finance your purchase. Because this does two things:

First, it gives you the funds to buy the equipment now and take advantage of Section 179. We have but a few weeks left in 2019, and financing the equipment allows you to get it before the 12/31 deadline.

Second, the money you save on your taxes (again, depending on your rate, it’s like you instantly get 25-35% of the purchase price as raw, keep-able dollars) will FAR EXCEED the payments you make. This can make 2019’s profit number soar, and also have a profound effect on 2020’s bottom line as well.

We have customers who finance a few items, and the money they save on their taxes covers their payments for as many as 18-24 months. That’s like getting the equipment for free for a year or two.  Plus, you are using the equipment to further increase your revenues, right? So that’s even more advantageous to your bottom line.

I know I chirp about Section 179 a lot, but seriously, it’s such a big deal that it astounds me when businesses do not take advantage of it every single year.  Make sure you’re not left out, and if I can help in any way, let me know! 

We got to talking about business growth, risk, and what it takes to be successful. And he said something that really resonated with me.

“Fletch, the hardest part about succeeding wasn’t starting the business, or even that first year or two when I had to do everything. The hardest part was making the decision to buy the equipment and a truck for a second crew.”  

He went on to say how easy we made it (that’s how we met, in fact), but this post isn’t really about financing equipment. It’s about the mindset that Edward had. He reached a point where he was successful on his own in his landscaping business – in fact he started turning away work, because Edward is only one guy (well, technically two guys, because he did hire a helper.) 

But that was the key – Edward didn’t want to turn away work. He knew that the only way to succeed was to replicate himself and expand. So he took the plunge, got a second crew going, his current helper was promoted to lead said second crew, and off they went.

Success followed, and a few years later, Edward took another giant step when he purchased a building and, in addition to having a “home base” for the landscaping business, started repairing small equipment as well. 

This was an even larger decision than the first one, but Edward says it was also easier. He had experience from his first “expansion” decision (and since that time, added a third crew). Yes, buying a building was a much, much bigger deal, but by now, “growth” was in his DNA.

I find it interesting that the first big expansion decision was the hardest, even if in raw dollars, it’s not anywhere near the biggest risk he took. But it was – that very first  “I need to grow, and I’m going to have to spend some money to do it” was the catalyst to everything. 

Food for thought. And yes, if you need fast, easy equipment financing to take that first big step, we’re here.

Continuing my series of why pretty much any time is a good time to finance equipment, let’s take a look at equipment financing in April.

First of all, for most companies, April is the first month of the second quarter. This means 1/4th of the year is already over, and most firms have a good handle on how they are doing. Since success is usually measured in years, and then those years broken down by quarters, these not-so-arbitrary lines in the sand are important.

So for equipment financing, if you are having a good year, it’s a no-brainer – keep that momentum moving. If you are not quite hitting your expected numbers, well, you know things aren’t simply turning around on their own, right?  Both of these thoughts are prime for new (or new to you) equipment.

Plus, now that the year is one-fourth over, we’re starting to enter a magical time for equipment financing and Section 179. Put simply, if you lease equipment now, you will probably make 6-7 payments this calendar year. Depending on the price of the equipment leased, it’s more and more likely that the net Section 179 deduction tax savings will exceed the total amount of payments you make this year. Meaning leasing the equipment will show a profit for this year. Yea, wow.

Spring is also a time of year when more companies start rolling out newer models. So if you were waiting for the latest and greatest, now might be a time to start looking.

Lastly, and you know I have to throw something like this in, April is the start of Baseball Season. Whether you are a sports fan or not (I am), there’s something pure and almost mythical about the start of a new baseball season. Hope springs eternal and all that. To me, that mood permeates everything, and makes for an optimistic outlook. The Cubs won last year – anything is possible (and no, I won’t let you forget that I nailed that one.)

Play Ball!   

Ahhh, springtime. When a young man’s fancy turns to… equipment financing!

(quick – Mrs. Fletch isn’t around, right?)

But seriously, March is a great time to finance equipment. Let me give you a few reasons why:

First, winter is ending. For about half the country, this isn’t that big of a deal. But for the other (more northern) half, it’s generally a sigh of relief. The snow melts, the birds return, and people start venturing outside again. And some industries start cranking up. To give a good example, many outdoor construction projects are impossible with frozen earth, you see few motorcycles in the winter, golf courses are shut down, etc. These all awaken in the spring, meaning the regional economic engine starts to run again.  

Related to that is the mental line in the sand this month brings. Many companies will say “we’ll tackle that after winter”. Add in Daylight Savings Time, and you have a clear shift in overall demeanor. Spring is a season of rebirth, and that includes equipment financing. It’s time to spruce things up and modernize!

March is also the end of the first quarter. Many companies use the first quarter to predict where the entire year is going. Look at your own company – by this point, you probably have a decent indicator of what kind of year 2017 is going to be. This makes economic decisions (like financing new or used equipment) a little easier.

Some of the reasons I mentioned for earlier months are still valid in March – some companies may still have a few of “last year’s models” around at really deep discounts. And time is marching on (pardon the pun) – your Section 179 tax deduction increases in effectiveness, especially when you combine it with an equipment lease.

Let’s throw in St Patrick’s Day too. I can’t think of a good reason that ties that to leasing equipment, but it has green beer and shamrock shakes, so it’s definitely worth mentioning.  

So put the snow shovel away and think about financing equipment!

Today, we’ll look at the two major lease structures, and discuss the advantages of both:

Let’s start with a Capital Lease. A capital lease is where the company / lessee want the equipment to appear on the balance sheet as an asset, but also wants to spread out the payments. The equipment leased is considered part of the company’s assets (i.e., ”capital”, hence the name). In fact, on paper, the company gets to treat the equipment as if they own it in every way, including claiming depreciation.

At the end of a Capital Lease, there is usually a buyout that is well below market value (e.g., a $1 buyout, a 5% buyout, etc.) The company/lessee makes this last payment, and the equipment is officially theirs.

Obviously, a Capital Lease is used when a company is fairly certain they will want to keep the equipment at the end of the lease. You could almost say a Capital Lease is like a loan.

But what if the equipment is something they don’t want to keep? Or don’t want on their balance sheet? That’s where an Operating Lease comes in.

An Operating Lease is a lease where the company/lessee is essentially making payments on the portion of the equipment’s value they are going to use. In other words, the seller/lessor figures out a future value of the equipment based on the desired lease term (“assuming normal use, what will this equipment be worth in three / four / five years?”). In general terms, the lease payments are based on that future value minus the current selling price.

The advantages to a company here is the fact that they do not / will not own the equipment, but still get to use it now. And the lease payments are considered operating expenses on an income statement (hence the name), which is a tax advantage over slower depreciation. Plus, the equipment stays off the balance sheet (which many companies would prefer). You could almost say that in broad terms, an operating lease is like long-term renting.

At the end of an operating lease, the company/lessee can return the equipment, re-lease it, or buy it for a price to be agreed upon in the future at lease end. You see these types of leases on vehicles a lot.

There you have it – the two basic lease structures. We’ll get into the individual lease types in the future.