Lease Financing

Leasing is a super financing alternative if you are seeking funding to obtain business equipment.
Finance companies, banks, and many firms that sell high-priced equipment will lease to you.

When you lease an item, the lessor retains ownership of it. You use the equipment by virtue of the
monthly payments you will be required to make. You can often purchase the equipment at the end
of the lease term for its market value or less.

A great advantage to leasing is that it may be allowed to be "off the balance sheet." This means
that leases can be disclosed as balance sheet footnotes. They do not appear as debt even though
they represent an ongoing company liability. This may sound like financial doublespeak, but it's
not. Let's say a supplier is considering whether or not to extend credit to you, or a bank is
weighing a loan proposal you have submitted. The lease commitment will play a relatively minor
role in evaluating your debt burden.

Banks also tend to consider their total exposure when lending to small businesses. If you have
obtained lease financing through a third party, they are more likely to lend you funds than if all of
your borrowing needs have been met through them. This is very important if you have a relatively
small business, because most banks expect you to use them exclusively for traditional lending
but may not care if you use a nonbank source for lease financing. In any case, though, do keep
your bank informed regarding any significant lease commitments you are considering prior to
actually signing any agreements.

omparison with operating lease

A finance lease differs from an operating lease in that:

 in a finance lease the lessee has use of the asset over most of its economic life and beyond
(generally by making small 'peppercorn' payments at the end of the lease term).

In an operating lease the lessee only uses the asset for some of the asset's life.

 in a finance lease the lessor will recover all or most of the cost of the equipment from the rentals
paid by the lessee.

In an operating lease the lessor will have a substantial investment or residual value on completion of the
lease.

 in a finance lease the lessee has the benefits and risks of economic ownership of the asset (e.g.
risk of obsolescence, paying for maintenance, claiming capital allowances/depreciation).

In an operating lease the lessor has the benefits and risks of owning the asset [2].

The U.S. Financial Accounting Standards Board and the International Accounting Standards

Boardannounced in 2006 a joint project to comprehensively review lease accounting standards. In July
2008, the boards decided to defer any changes to lessor accounting, while continuing with the project for
lessee accounting, with the stated intention to recognize an asset and obligation for all lessee leases (in
essence, making all leases finance leases). The projected completion of the project is now 2011. [3] [4]

[edit]Treatment in the United States

Under US accounting standards, a finance (capital) lease is a lease which meets at least one of the
following criteria:

 ownership of the asset is transferred to the lessee at the end of the lease term;
 the lease contains a bargain purchase option to buy the equipment at less than fair market value;
 the lease term equals or exceeds 75% of the asset's estimated useful life;
 the present value of the lease payments equals or exceeds 90% of the total original cost of the
equipment.

Following the GAAP accounting point of view, such a lease is classified as essentially equivalent to

apurchase by the lessee and is capitalized on the lessee's balance sheet. See Statement of Financial
Accounting Standards No. 13 (FAS 13) for more details of classification and accounting.

[edit]Special Case: Finance Leases under UCC Article 2A

The term sometimes means a special case of lease defined by Article 2A of the Uniform Commercial
Code (specifically, Sec. 2A-103(1) (g)). Such a finance lease recognizes that some lessors are financial
institutions or other business organizations that lease the goods in question purely as a financial
accommodation and do not want to have the warranty and other entanglements that are usually
associated with leases by companies that are manufacturers or merchants of such goods. Under a UCC
2A finance lease, the lessee pays the payments to the lessor (and indeed must do so, regardless of any
defect in the leased goods – this obligation usually being contained in a "hell or high water" clause), but
any claims related to defects in the leased goods may be brought only against the actual supplier of the
goods. UCC 2A finance leases are usually easy to identify because they commonly contain a clause
specifically declaring that the lease is to be considered a finance lease under UCC 2A.

Advantages and Disadvantages of Lease Financing

for Businesses
Date: Tuesday, January 18 2005
It has become increasingly more common in recent years for companies to lease equipment. Each
leasing agreement needs to be read through carefully to understand the terms and conditions within said
lease.

Typically a lease can run anywhere from one to five years. Most equipment necessary

in commercial businesses today, including technical equipment, can be leased. Some leases provide an
option to then purchase the equipment at substantially less money when at the end of the term of the
lease. By leasing equipment, if structured properly, you can maintain your credit availability, as the lease
debt does not have to be considered a direct liability on your financial statements. This is advantageous,
as it does not limit your ability to borrow from lending sources.

Advantages of lease financing:

 It offers fixed rate financing; you pay at the same rate monthly.

 Leasing is inflation friendly. As the costs go up over five years, you still pay the same rate as
when you began the lease, therefore making your dollar stretch farther. (In addition, the lease is not
connected to the success of the business. Therefore, no matter how well the business does, the
lease rate never changes.)

 There is less upfront cash outlay; you do not need to make large cash payments for the
purchase of needed equipment.

 Leasing better utilizes equipment; you lease and pay for equipment only for the time you need
it.

 There is typically an option to buy equipment at end of lease term.

 You can keep upgrading; as new equipment becomes available you can upgrade to the latest
models each time your lease ends.

 Typically, it is easier to obtain lease financing than loans from commercial lenders.

 It offers potential tax benefits depending on how the lease is structured.

One of the reasons for the popularity of leasing is the steady stream of new and improved technology. By
the end of a calendar year, much of your technology will be deemed "dinosaurs." The cost of continually
buying new equipment to meet changing and growing business needs can be difficult for most small
businesses. For this reason leasing is very advantageous.
Leasing can also help you enhance your status to the lending community by improving your debt-to-equity
and earnings-to-fixed assets ratios. There are a variety of ways in which a lease can be structured. This
provides greater flexibility so that the lease is structured to best accommodate the individual cash flow
requirements of a specific business. For example, you may have balloon payments, step up or step down
payments, deferred payments or even seasonal payments.

Disadvantages of lease financing:

Leasing is a preferred means of financing for certain businesses. However it is not for everyone. The type
of industry and type of equipment required also need to be considered. Tax implications also need to be
compared between leasing and purchasing equipment.

 You have an obligation to continue making payments. Typically, leases may not be terminated
before the original term is completed. Therefore, the renter is responsible for paying off the lease.
This can pose a major financial problem for the owners of a business experiences a downturn.

 You have no equity until you decide to purchase the equipment at the end of the lease term, at
which point the equipment has depreciated significantly.

 Although you are not the owner, you are still responsible for maintaining the equipment as
specified by the terms of the lease. Failure to do so can prove costly.