Financing Basics
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.
