Beneficial Capital - Leasing Basics

What is an equipment lease...really?

An equipment lease is a written agreement by the lesse to pay rent to the finance company (lessor) for a specified amount of time in exchange for use of the equipment. During the life of the lease, the lessee is responsible for maintaining and insuring the equipment. At the end of the lease contract, the lessee has several options. The lessee usually has the option either to complete the purchase of the equipment or return the equipment

Leases usually include the following terms and conditions: length of lease, timing and amount of payments, and end of lease options.

The "Last Resort" Vehicle

First impressions can be lasting, but, for equipment leasing that just hasn't been the case. Leasing is, and has been for some time, the fastest growing financial vehicle for businesses - from small to Fortune 100 companies.
Equipment leasing has evolved. It now, better than ever, can meet the demands of large, medium, and small businesses. It offers tremendous benefits at very reasonable rates.
As more customers take advantage of the benefits leasing offers, their leverage strengthens creating a stronger cash flow, and it can allow for a borader range in brand and amount of equipment acquired. Leasing can create a strong competitive advantage.

Hidden Costs

Equipment leasing has no hidden costs at the beginning, middle or end. The customer knows the exact monthly rental payment, and, the options at the end of the lease.

High Interest Rates

Equipment leasing is not like furniture leasing of the early '80's. A customer pays for the equipment at a very competitive rate.

Expensive Buyout

The buyout on a true lease is set "not to exceed 10% of the original equipment cost". Therefore, the buyout cannot be increased arbitrarily. The customer knows the buyout before entering into the agreement.

Beneficial Capital offers two general types of lease structures: True Lease (Fair Market Value) and Dollar Purchase Option.

True Lease (FMV)
This lease is a good option for our customers who want to own or upgrade their equipment at the end of their lease. Monthly rental payments are made over the life of the lease contract. The most common terms are 36, 48, or 60 months. The term is selected by the lessee (user of equipment).

At the end of the lease term, our customers have three options:

return the equipment
purchase the equipment at Fair Market Value not to exceed 10% of the original equipment cost, or
renew the lease for an additional 1-year term.

The prominent benefit of the True Lease Structure is the possible tax savings. It is our understanding that because the title of the equipment does not automatically transfer to the lessee at term end, and, because there is no guaranteed bargain purchase option, the monthly payments plus the sales/use tax can be tax deductible.

Dollar Purchase Option (Conditional Sales Contract)
This lease is designed for customers who know their equipment will not lose value over the life of the lease. Monthly payments are higher than the True Lease because the equipment in essence is "paid off" during the life of the lease, and, therefore, can be purchased for $1 at term end. It is our understanding that this structure, which provides for a bargain purchase option, negates the tax reporting attributes of the lease.

	Leasing	Bank Financing
Interest Rate	Fixed rates/fixed payments	Usually an adjustable rate
Terms	Up to 5 years	Usually 2 - 3 years.
Down Payment	0 - 5% (1st and last payment)	Typically 10 - 30%
Financial Statement	Not mandatory for transactions up to $75,000 and financials are not required annually after that.	Required on almost all transactions over $10,000 and banks usually require annual updates to maintain loan.
Sales Tax	Part of monthly payment	Must be paid in advance
Hidden Requirements	None. Application fee only on completed transactions.	Compensating balances, other bank charges, loan covenants.
Tax Benefits	Usually 100% deductible over the term of the lease (makes effective rate lower)	Depreciated over the IRS's useful life of the equipment. Principal is not deductible.
Effective Costs	Possibly lower than bank financing due to tax benefits, lower down payment, longer lease term, and no requirements for compensating balances.	Higher cost due to longer depreciation schedule, larger down payment, adjustable interest rate, and other hidden costs.
Opportunity Cost	Preserves bank lines and cash, for operating expenses such as salaries, advertising, etc.	Depletes bank lines, possibly preventing opportunities to expand your business.
Risk	Pledges only leased equipment	May require assets, home or other assets as collateral.
Quick Response	Yes	No
Deferred Payments	Yes	No

Interest Rate vs Lease Rate

Know the difference. By definition, the IRS has ruled that to qualify as a lease, the payments cannot be broken into interest and principal Therefore, the term "interest rate" does not apply to a true lease. Subsequently, some lease companies quote a "lease rate" (which is NOT an interest rate and can be ambiguous). To accurately compare rates, we suggest comparing actual payments. In general, the stronger your credit history and longer your time-in-business, the lower your payments should be.

Pre-Approvals (letters and credit cards)

Here's how it works. You receive a pre-approved credit card in the mail. It refers to you by name and states that you are pre-approved for a preset dollar amount and may even give you an activation key. When you call (be cautious of 900 numbers), the finance company will require your social security number to "activate" your account. When you hang up the phone, you believe you just secured a lot of money. However, that finance company will be running a credit bureau check with your SS# and may or may not approve you. Therefore, they may or may not activate your credit card.
How to Protect Yourself
1. Be careful. Don't sign a lease or select equipment based on a pre-approval! Make sure you receive an approval. There is a difference.
2. You cannot receive an active credit card immediately. A finance company will need to check your credit history using your SS#. Do not believe them if they say they do not require a credit check.
3. Be careful using 900 number. They can be very costly and part of the scam.