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: Graduated payment plans -- step-up plan, seasonal payments, etc.
Residual Value: Residual Value for a lease is the booked value of the equipment at the end of term, usually $1.00 or 10% of equipment cost, or expected fair market value. With our EFA, there is no residual value.
End of Term Options: Lease vs. OPC Loan
End of Lease 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.
End of OPC Loan: There are no end of term options with our loan (also called an Equipment Finance Agreement). You own the equipment free and clear of any liens or encumbrances. It is your equipment.