Leasing Resources

Glossary

A

Acceptance Certificate: When leased equipment is delivered and installed, the Lessee certifies to the Lessor that installation is complete, that the Lessee is ready to start paying rent, and that the Lessor should pay the vendor any final balance due for the equipment acquisition.

Advance Payments: Many leasing transactions call for one, two, or more payments in advance. Advance Payments are payable at or prior to lease inception.

"Application Only" Credit Review: Some Lessors grant credit using the information submitted on lease applications rather than financial statements. This data, along with input from bank and trade references and independent credit bureau reports, is used to review credit up to certain transaction size limits. AEL Financial can provide "App-only" for transactions up to $150,000 with a credit approval response in under a minute in most cases.

Assignment: Lease Agreements generally contain a provision permitting the Lessor, or other type of Lender, to transfer the Lease to another party by Assignment. Most often Lessors employ their own documents and utilize assignment provisions to sell transactions to funding sources. Terms and conditions for assignments vary regarding recourse and other provisions such as the right, title, and interest in the equipment financed. Assigning the lease does not affect the terms and conditions of the lease itself.

B

Budgets: Most businesses use budgets to forecast and allocate expenditures for specific periods of time. Typically, capital budgets include allocations for equipment acquisitions, while operating budgets apply to the periodic expenses incurred in running a business. Often, when capital budgets are exhausted, or have been allocated for other purposes, businesses can use available funds from operating budgets to lease needed equipment. Since lease payments are typically made monthly and are small in comparison to the full outlay of the equipment's purchase price, businesses can "stretch" their equipment acquisition power by leasing.

C

Capital Lease:  A capital lease is classified on a balance sheet just like a bank loan, with deductible interest expense on your income statement. At the end of your lease, the lessee can purchase the equipment for a nominal sum.

Cash Flow: Cash Flow is a measure of a business' ability to meet is obligations. Often referred to as EBITDA, Cash flow is calculated by adding the business net income before interest, taxes, depreciation, and amortization. Net Cash flow is equal to Cash Flow minus debt service and other non-cancellable financial obligations.

Corporate Resolution/ Incumbency Secretary: A Corporation must attest that the individual executing a Lease Agreement on its behalf is duly authorized to do so. On this form, the Corporate Secretary or other authorized officer, attests that the signatory is empowered by name of title, to execute Lease Agreements for the Lease.

Credit Scoring:  Credit Scoring systems typically formulate values assigned to various credit criteria to create a scoring model. Credit scoring models are generally derived historical portfolio performance with Lessees of similar type, organizational structure, credit history, size, age, and credit bureau rating, along with other criteria an individual Lessor may choose to include.

D

Default: A Default is the failure of a Lessee to meet an obligation called for in a Lease or credit agreement. The  agreement will outline what events may trigger a default.

Documentation: Leasing terms and conditions are set out in written Lease Agreements, sometimes comprising several different forms. Documentation requirements vary, depending on the type of lease and the particular contractual policies of individual Lessors.

Down Payments: Leases typically do not require down payments whereas bank loans generally do require them. Lessees with a minimal or negative credit history may choose to offer a Down Payment to get their lease approved.

E

Equipment: The Equipment is the specific item(s) leased by the Lessee as covered by a particular Lease Agreement. Although not specified in the lease agreement, lessees may be allowed (depending on the lessor) to include many "soft cost" items such as training, installation, and freight.

Equipment Supplier (Vendor): The "Equipment Supplier" is the seller/ manufacturer of the equipment to be leased.

F

Finance Lease: A Lease in which the service provided by the lessor to the lessee is limited to financing equipment. All other responsibilities related to the possession of equipment, such as maintenance, insurance, and taxes are borne by the lessee.

G

Guaranty (Personal/Corporate/Other): Often, business owners especially in the case of proprietorships, partnerships, closely-help corporations, or small businesses, may be required to personally guarantee a leasing transaction. At other times, a business may be a subsidiary of another business. Depending on the circumstances, the Lessee's parent company may be required to guarantee a leasing transaction.

I

Insurance: Most Lessors require the Lease to insure the equipment against casualty loss, all risks, and require that the Lessee indemnify the Lessor against any liability incurred from possession, operation, or usage of the equipment. This is very similar to the insurance requirement for automobile financing.

L

Lease: A Lease is a transaction wherein a "Lessor" owns particular equipment and agrees to permit a "Lessee" to use it. Lease terms typically cover two to five or more years, depending upon the specific equipment. Lessors ordinarily offer monthly payments but individualized payment structures can often be tailored to meet particular Lessees accounting, cash-flow, or other financial requirements. Lease Agreements can often provide for the Lessee's purchase of the equipment at the end of the original lease term. Most often, the Lessee will select the specific equipment to be leased and choose the Vendor from whom that equipment will be purchased. The Lessor will then purchase the equipment on the Lessee's behalf.

Lease Agreement: The lease agreement contains the basic terms and conditions of the lease.

M

Master Lease Agreement: Under a Master Lease agreement, the basic terms and conditions of the lease are established. For each individual funding of equipment a Lease Schedule is prepared, setting forth the specific rentals and terms related to the particular schedule.  Master Lease Agreement allow for increased flexibility and reduced paperwork, since the base agreement only needs to be created once.

O

Off Balance Sheet Financing: Financing that does not add debt to a balance sheet.

Operating Lease: A lease which qualifies under FASB 13 as an operating lease, based on the following four criteria:  (1) The lease term does not exceed 75% of the useful life of the equipment, (2)  Title to the equipment does not automatically pass to the lessee at the end of the lease term, (3) The lease can not have a bargain purchase option, and (4) The present value of the minimum rentals must be less than 90% of the equipment cost.  An operating lease adds no balance sheet asset or liability and the rental payments are treated as an operating expense. A True Lease is not necessarily an Operating Lease.

P

Purchase Option: Leases often provide an option for the Lessee to purchase the equipment at the end of the lease term. Purchase options may state a specific purchase price or the percentage of equipment cost to be paid, the terms and conditions and any other provisions related to the option.

R

Rate Factor: The rental payment expressed as percentage of equipment cost is commonly known as a "Rate Factor". Once the appropriate Rate Factor has been calculated, any applicable equipment cost can then be multiplied by that Rate Factor to derive the lease payment.

Residual Value: Equipment may have a remaining or resale value at the end of the original lease term. The remaining value is referred to as the Residual Value.

S

Schedules: Leases which contemplate multiple items of equipment or equipment delivered over time, often use Lease Schedules.  Schedules are used in conjunction with a Master Lease Agreement which provides for the basic terms and conditions of the lease.

Security Deposits: Security Deposits are paid at, or prior to, lease inception. Security Deposits protect the Lessor by offsetting losses due to unreasonable wear and tear to returned equipment, the non-return of equipment, unpaid late fees, or any other costs.  Security deposits are often used for new businesses to allow them to obtain financing even when they have a limited track record.

T

Tax Advantaged Leases: Also called "True Leases".   When a Lessor is considered the owner, for tax purposes, or the equipment, it may be entitled to claim the depreciation benefits related to the equipment. 

Taxes, Sales/Use/Personal Property: Most Lease Agreements require the Lessee to pay any applicable taxes or fees related to the leased equipment including sales or use tax, or other taxes.

U

Uniform Commercial Code Forms (UCC 1): Standardized UCC-1 forms are commonly used by Lessors to perfect their security interest in the leased equipment. UCC-1s are filed with the Secretary of State's office. The purpose of filing these forms is to notify other parties who may seek a security or other interest in the specific equipment, that a particular party currently has a secured interest in the identified equipment.

V

Vendor (Equipment Supplier): The Vendor is the seller, distributor, or manufacturer of the equipment to be leased.