Types of Lease Programs

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Types of Lease Programs

Lease programs come in a variety of shapes and sizes. Chances are that there is at least one program that will fit well with your business. However, before you decide to sign up with a lease program, you should make sure that you are getting the proper program for your needs. And, you should also look into other options, such as bank financing, to see if they are feasible and meet your needs better than leasing. If you decide that leasing is the best course for your business, then you should explore different plans. Here are some of the main leasing programs available. Some of these, in addition to others, will be discussed later.

True Lease

This is the most popular and the standard equipment lease program. It is sometimes called a fair market value (FMV) lease. The true lease program is straight leasing. The company determines the monthly payment (which is usually fairly low) on new, used, or leaseback equipment. It is even possible to claim the payment as a tax deduction in some cases. At the end of the lease, a true lease offers the following options:

  1. Renew the equipment lease
  2. Return the equipment and be done
  3. Upgrade to new equipment
  4. Purchase the leased equipment at its current FMV

Finance Lease

An equipment lease under a finance lease program is almost like buying the equipment. You pay the entire cost of the equipment, and interest, over the lease's primary term. During the structuring process, the monthly payments are determined. At the end of this lease, the opportunity to purchase the equipment offers an advantage: the equipment can be bought at a very low cost. However, there are not immediate tax benefits to using a finance equipment lease.

Operating Lease

An operating lease is among the more popular equipment lease programs. This type of program involves off-balance sheet financing. You have the option to replace or upgrade your equipment on a continual basis. You do not have to worry about ownership, and this lease structure offers lower monthly payments than most other financing and lease options. At the end of the lease, you can turn in the equipment, protecting yourself from having to keep obsolete equipment.

Capital Lease

Equipment leases set up with a capital lease structure are almost like buying the equipment. You have to capitalize the obligation on the balance sheet, as you have the option to buy the equipment when the lease ends. It is recorded as an asset and a corresponding liability. At the end, the purchase option is generally at 10% or $1.00. If a business plans to keep the equipment after the end of the lease, this is a very eligible arrangement. Other options at the end of the term include trading for new equipment or selling the equipment.

Other Equipment Lease Options

There are lease programs that allow the business to structure an agreement according to special cash flow needs. A seasonal payment lease is one in which the payments fluctuate according to season (lower for part of the year, and then higher for the rest). The deferred equipment lease allows you to defer payments for 60 to 90 days after the initial payment. This is a good way to get some revenue flow before paying a monthly equipment bill.

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