Leasing Terminology

Acceptance – The lessee’s acknowledgement that the equipment to be leased has been received and is in satisfactory condition. For the lessee’s protection, funds will not be released to your vendor until Central Leasing has received your written “delivery and acceptance” form and been able to confirm your acceptance by telephone.

Advance Lease Payments – Most leases call for a specific number of lease payments in advance. One to two payments is a typical requirement. The advance payments reduce the total number of payments during the term of the lease. (Bank financing typically requires much larger down payments, usually 10 percent to 25 percent of the purchase price to close the loan, along with origination and other fees.)

“Application Only” Program – A lease program that uses a streamlined credit application and review procedure that only requires the submission of a single-page application with basic information about the business’ principals, bank and trade references. This type of program does not require financial statements, tax returns, business plans or other more detailed disclosures.

Deferred Payment Lease - The initial lease payments are deferred 60, 90 or 120 days to accommodate cash flow and capital budgeting requirements.

End of Lease Options – Options for what happens to the equipment after all payments have been made. Typical options are the $1 Buyout, Fair Market Value (FMV), Purchase Upon Termination (PUT), equipment return, and continued leasing.

Fair Market Value (FMV) Lease – A lease agreement that provides greater flexibility and lower monthly payments than the Finance Lease format, and may offer tax advantages. Key benefits include a number pre-set, end-of-lease options:

Return the equipment with no further obligation,
Purchase the equipment for its fair market value,
Re-lease the equipment for its fair market value, or
Continue leasing on a month-to-month basis.

Finance Lease ($1 Buyout, Capital Lease or Bargain Purchase Lease) - These four terms describe leases that combine lower, fixed monthly payments with the guaranteed-in-advance right to purchase the equipment at the conclusion of the lease term at a pre-determined price. These leases generally do not qualify as deductible operating expenses and must be amortized and depreciated. There are, however, some significant other tax benefits under I.R.S. section 179, which may be available to your business.

Insurance - Because leased equipment is technically owned by the lessor until the satisfactory conclusion of the lease term, proof of all risk and casualty insurance will be required, showing the lessor as a “named insured.”

Lessee - The entity that is leasing the equipment from its owner, the lessor.

Lessor - The owner of the equipment and the recipient of lease payments.

Master Lease - One lease (and one credit approval) for several pieces of equipment purchased at different times from one or more vendors. Once you have been approved, Central Leasing requires only brief addenda and equipment schedules for each new batch of equipment.

Off-Balance Sheet Financing - Financing that does not add debt to a company’s balance sheet. This can be extremely important to companies with bank or other lender-imposed key operating ratio requirements. For example, under a true lease, the lessee does not show the leased equipment as an asset (the lessee does not own the equipment, nor does the lease structure contemplate ownership), nor therefore, is the lessee required to report the corresponding long-term liability. 

Operating Lease - Any lease that is not a capital or finance lease. See FMV lease (above).

Progress Payments (Vendor Pre-Funding) - A special kind of lease for vendors who require up to 100% of the selling price prior to delivery. (Most leases are designed to fund your equipment vendors immediately after you confirm that the equipment that you ordered has been received in satisfactory order.) Some vendors, however, require that specially ordered, configured or manufactured-to-order equipment be paid for in stages ranging from small up front, order-confirmation deposits, to multiple “progress payments” as the order gets closer to shipping, to full-prepayments. Central Leasing can accommodate almost any equipment vendor’s pre-payment requirement.

Purchase Option - See “End of Lease Options”

PUT Option (Purchase Upon Termination) - A specialized option, which can be offered in conjunction with an FMV lease, that requires a purchase of the equipment at the conclusion of the lease at a fixed-in-advance percentage of the original purchase price.

Rate Factor - Once the equipment cost has been determined, the actual monthly lease payment (before tax and one-time fees) can be computed by multiplying “the factor” (usually expressed as a five-digit, decimal number) by the equipment’s cost.

Residual Value - The remaining market value of the equipment at the end of the lease term.

Sale Lease Back - A technique for re-capturing cash previously expended on equipment by selling that equipment to Central Leasing, who in turn leases that same equipment back to the company over a period of 12 to 60 (or more) months. Central Leasing will readily “buy back” most any equipment that has been purchased new, within the previous 90 days, based on the manufacturer/dealer’s original invoices. Older or used equipment may be subject to an independent valuation appraisal prior to funding.

Seasonal Payments - Lease payments that are “adjusted” to accommodate a business’ cash flow seasonality. Payments are set lower for the business’ “slower” or “off-season” months and set slightly higher during months of the business’ traditionally stronger cash flow. For example, payments might be lower initially to allow a company start generating.

Security Deposit - An amount paid at the beginning of the lease that is held by the lessor until the satisfactory payment of all amounts due under the lease terms, at which time the security deposit amount is returned to the lessee.

Skip Payment Leases - The lessee selects a series of months in which no-payments will be due.

Step Payment Lease - Lease payments are stepped up (or down) to accommodate the lessee’s anticipated cash flow pattern as the company begins to see its return from the acquired equipment. For example, payments might be lower initially to allow a company to start generating cash flow.

TRAC Lease - Many of the benefits of a true lease, but designed specifically for vehicles like trucks, cars, tractors & trailers. Special provisions of the tax code allow for pre-determined end-of-lease valuations (unlike a true or FMV lease). Generally the most aggressive pricing for specified equipment. May include FMV or continued rental options.

True Lease (Tax or Operating Lease) - A true lease, by definition, does not call for the full payout of the equipment cost during the lease term, nor does a true lease contemplate a transfer of title following the conclusion of the lease. The lessee is only paying for the equipment during a portion of that equipment’s useful life. Hence, the lease payments are often treated as 100 percent tax-deductible operating expenses. The lease generally does not appear on the balance sheet as a business asset or as a business liability. This type of lease also offers the lowest payments for a given term. A true lease may (but does not have to) include an FMV (fair market value) option, which allows the lessee to purchase the equipment for its legitimate fair market value at the time the lease terminates.