Equipment Leasing Glossary of Terms Advanced lease payment(s), Bargain renewal option, Captive leasing company, Closed-end lease, Deferred payment lease, Dollar buyout, Effective lease rate, Estimated residual value, Estimated useful life, Fair market value option, Finance lease, Lease rate (monthly payment), Lease rate factor, Lease term, Leasing line, Lessee, Lessor, Level payments, Net lease, Non-payout lease, Open-end lease, Operating lease, Platinum lease, Purchase option, Renewal option, Residual value, Sale-lease back, Skip lease, Step-up lease, Tax lease, Term, True Lease, Vendor program

Equipment Leasing Glossary of Terms

There are many terms related to equipment leasing. It can get very confusing. For example, what is the difference between a finance lease, an open-end lease and a non-payout lease? Let Huddle Business Capital help explain the difference between these terms

• Advance Lease Payment(s)

  The payment or payments made at the initiation of the lease contract, i.e. first rental payment or first and last rental payments.

• Bargain renewal option

  A lease provision allowing the lessee to renew the equipment lease for a rental rate predetermined at lease inception that is substantially lower than the expected fair market value at the date of the option.

• Captive leasing company

  A subsidiary leasing arm of a manufacturer or dealer.

• Closed-end lease

  A true lease in which the lessor assumes the depreciation risk. The lessee bears no obligation at the end of the lease.

• Deferred payment lease

  A payment schedule that allows you to defer your first payment by 60 or 90 days.

• Dollar buyout

  Assuming that the lessee is not in default, this is an option at the end of the lease to buy the leased property for $1.00.

• Effective lease rate

  To compare this rate with a loan interest rate, a company must include in the cash flows any effect the transactions have on federal tax liabilities

• Estimated residual value

  For purposes of calculating the maximum allowable term of a “tax-oriented lease,” this is the “fair market value” of the lease equipment at the end of the lease term, calculated in constant dollars excluding inflation or deflation.

• Estimated useful life

  The estimated time period leased equipment is expected to be useful.

• Fair market value purchase option

  An end-of-term lease option that allows you to purchase the equipment at its fair market value.

• Finance lease

  A type of lease whereupon the lessee makes periodic payments for the use of an asset with an option to purchase for a nominal fee at the end of the lease term.

• Lease rate (monthly payment)

  The periodic payment to a lessor for the use of assets.

• Lease rate factor

  Numerical factor multiplied by total cost of equipment to compute periodic rentals.

• Lease term

  The fixed term of the lease.

• Leasing line

  A maximum amount of funding designated by the lessor for a lessee to use over a fixed commitment period.

• Lessee

  The party that leases the equipment.

• Lessor

  The company that agrees to buy the equipment and rent it back to you.

• Level payments

  Equal periodic payments over the term of the lease.

• Net lease

  A lease where payments paid to the lessor do not include insurance, taxes and maintenance, which are paid separately by the lessee.

• Non-payout lease

  A lease in which the cash flows will not be sufficient to cover the full costs of the equipment, the costs of financing, the costs of administration and to provide a satisfactory return. The lessor looks to the residual to realize profit

• Open-end lease

  A lease which includes a provision for extending payments under the lease on predetermined terms after a set period of time

• Operating lease

  For accounting purposes, an operating lease is any lease which is not a capital lease. These are generally used for short term leases of equipment. The lessee can acquire the use of equipment for just a fraction of the useful life of the asset.

• Purchase option

  A provision, assuming the lessee is not in default under the terms of the lease, by which a lessee has the right to purchase the equipment at the end of the lease. The purchase option may be stated at a specific dollar amount or at fair market value.

• Renewal option

  Lessee’s option to renew a lease contract when it ends.

• Residual value

  The value of the asset at the end of the lease.

• Sale-lease back

  You sell equipment that you already own to a lessor who agrees to lease it back to you.

• Skip lease

  Geared for companies with limited cash who are dependent on the acquisition of specific equipment to increase revenue. Payment amounts increase over time under this repayment schedule.

• Tax lease

  A lease where the lessor recognizes the tax incentives provided by the tax laws for its investment and ownership of equipment. Generally, the lease rate factor on tax leases is reduced to reflect the lessor’s recognition of this tax incentive.

• Term

  The length of time a lease agreement will remain in force. The rules of an agreement as supplied on a rental or lease contract between the customer (lessee) and the lessor. The terms of the contract will govern such things as the length of the agreement, rules of proper cancellation of the agreement, renewal terms, and charges for breech of the contract.

• True lease

  Depending on its structure, a type of lease that allows you to fully claim lease payments for tax purposes. The term is generally shorter than the full useful life of the equipment. At the close of the lease, you can decide to purchase the equipment at fair market value.

• Vendor program

  A partnership between a funding source and manufacturer or dealer to offer leasing to their customers. In this case, the funding source can be likened to a captive lease company.