Equity lease financing allows lessees to control an asset while finance companies retain legal ownership. Companies should seek low startup fees, no administration costs, specific terms, and an advantageous purchase option. Avoid down payments and negotiate security deposits and purchase prices.
Lease finance is a purchase method that allows the lessee to control an asset and the risk benefits to their property. The finance company, however, retains legal ownership. The best equity lease financing options include low startup fees, no administration costs, specific terms and an advantageous purchase option. A company must follow specific accounting rules for classifying a lease by the lease term. Otherwise, the lease is an operating lease and the company does not receive lease benefits.
Companies should seek to avoid down payments with equity lease financing. These payments only increase the total cost of the asset upfront, requiring a longer payback period in terms of cash flow. Some capital leases may require a security deposit, however, if the company plans to return the asset at the end of the lease. In some cases, the security deposit may be negotiable based on the initial lease terms. A company may be able to classify a security deposit as an asset rather than an expense.
Administrative fees are associated with capital lease financing as a service fee. Landlords or finance companies may charge these fees upfront or on a monthly basis. These charges are expenses as they are unrelated to the asset in the lease. Administrative fees may vary depending on the life of the concession and the type of asset in the contract. Companies need to find equity leases with low or no administrative fees.
Specific and fixed terms are another must in equity lease financing. In some cases, a lease may run for several years due to the asset the lease covers. Businesses need a specific length of time in months, low minimum transaction amounts, fixed interest rates, and other favorable terms. They may need to negotiate these terms with the lessor or finance company. Purchasing capital leases at various finance companies can help a company get the best lease.
An advantageous purchase option is required in equity lease financing. At the end of the lease, the lessor or finance company must be able to sell the asset for $1 US dollar (USD) or a low percentage of the total cost of the asset. Businesses can negotiate the purchase price in a manner similar to lease terms. The purchase price must transfer legal ownership of the asset. There should also be tax advantages in purchasing the lease; may require the use of a tax attorney to determine benefits.
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