Fair market value (FMV) lease vs. $1 buyout

Equipment costs money, and businesses need essential equipment. Leasing options allow you to spread payments over time and keep your cash in hand. According to the Equipment Leasing and Finance Association, nearly 8 in 10 businesses finance equipment, utilizing loans, leases and lines of credit.

Equipment loans and lines of credit are an option for some, but they usually require a down payment. In contrast, leasing arrangements avoid a large cash output and instead schedule customized periodic payments. Leasing is often preferred over a loan if costs include ancillary services such as delivery, transportation, installation, testing, or other “soft” expenses that can be rolled into the monthly lease payment.

Equipment leasing serves companies of all sizes across a wide range of industries.

What can I lease? And how?

You can lease just about everything. There are few limits.

The range of assets and equipment that qualify for leasing is vast: from giant, industrial manufacturing machinery, to daily usage items like cleaning equipment, to bulk purchases like multiple laptops, vehicles, furniture, phones or technology.

Although business owners require certain items to operate, they are wise to be creative with their financing. Maintaining working capital without large cash outlays is the most obvious advantage of equipment leasing.

Two major lease options are the fair market value (FMV) lease and the $1 buyout lease. Both are useful. Both allow business owners to avoid a large lump-sum expenditure. Both have specific benefits, based on your needs.

Here are the distinctions.

Fair Market Value Lease (FMV)

$1 Buyout Lease

Lease to use

An operating lease to use equipment; Also called a “true lease”

Lease to own

A capital lease to own equipment; Is essentially a loan

Good for: long-life equipment that maintains high residual value like aircraft, manufacturing tools, construction machinery

 

Also good for: short-term, seasonal or project-based equipment that you don’t want to keep, or equipment that may become obsolete

Good for: equipment you intend to keep and own; items that retain value like construction equipment, automotive repair, material handling

 

Also good for: high-cost equipment that is financed over time, in contrast to a large down payment

Payment: You don’t pay the full cost of the equipment over the term of the lease. Upon expiration, you can opt to return the equipment or purchase it at a fair market rate. There is no obligation of ownership. Terms range from 12-60 months with fixed monthly payments that are generally lower than $1 buyout payments. Payment: Flexible payments are based on the residual value of the equipment and your intention to purchase at the end of the term. It works as a loan and ownership is transferred.
Pros:

·         You won’t get stuck with obsolete equipment

·         Outsourced, hassle-free asset management, delivery, repairs, service, and disposal

·         Scalable terms according to growth, so the type and amount of equipment can fluctuate

·         Can deduct monthly lease payments as business expense

·         Maximum flexibility

Pros:

·         You have ownership of the equipment

·         100 percent financing with no down payment

·         Appears on balance sheet as company asset; entire amount can be deducted as business expense the first year of purchase

·         Cost of equipment is $1 at end of term

Typical industry uses: technology that gets outdated quickly, startup venture with uncertain future needs, renewable energy systems, computer hardware and software, tooling, transportation fleets, etc. Typical industry uses: central technology systems, construction, machinery, tooling, cleaning equipment, pressure washers, commercial vehicles, equipment manufacturers and dealers who want customers to have their products, etc.

Call Crestmark for a customized equipment leasing solution. We help. 888-999-8050.

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