Financing Basics

Equipment Financing 101

An equipment finance agreement (EFA) and/or lease is a binding legal document which you should fully understand before signing.

Here's a quick primer to get you started.

Parties to an EFA
Borrower: The party that is borrowing the money to purchase equipment. Also the party that has title to the equipment.
Lender: The party that is lending the money. They take a security interest in the equipment.

Parties to a Lease
Lessor: The party who has legal or tax title to the equipment, and grants the right to use the equipment and receive payment for that right.
Lessee: The party who is obligated to pay rentals and is entitled to use and possess the equipment.

Payment Terminology
Frequency: Usually monthly, but also quarterly, semi-annually or annually.
Advance: Payments due at the beginning of each period.
Arrears: Payments due at end of the period.
Structured: Step up/down, skipped, seasonal, etc.

Residual Value:
Booked value of the equipment at the end of the term (balloon). Usually $1.00 or 10% of equipment cost, or expected fair market value.

End of Term Options:
  • Return to lessor without further obligation.
  • Purchase equipment at a fixed price determined by agreement (lease).
  • Purchase equipment at Fair Market Value (FMV) as determined by appraisal.
  • Renewal or extension of lease at rate determined by agreement.
With an EFA, the security interest in a piece of equipment is terminated at end of term.

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