What is a lease?
In its simplest terms, a lease is an agreement between a party who owns a piece of equipment (the Lessor), and another party who wants to pay for the use of that equipment (the Lessee) for a specific period of time at a specific lease rate.
Who leases and why?
Leasing can meet any or all of the following needs:
- Increased Bonding Capacity: With off-balance sheet financing, the asset and associated lease payments are not listed on the Lessee's balance sheet.
- Increased Borrowing Capacity: With an Operating Lease, the Lessee does not have to show the full balance of the lease payments as debt on financial statements.
- Tax Considerations: Some customers can avoid the negative consequences of the AMT (Alternative Minimum Tax) and the Mid-Quarter depreciation trap (consult a tax expert).
- Specific Job or Equipment Need: A lease makes it easy to acquire specialty equipment and tie it to a specific job.
- Technological Advances: Through leasing, the customer can afford to operate the most modern equipment fleet and avoid excessive maintenance and downtime.
Why would a customer not lease?
Many customers are unsure about leasing for any of several reasons (they are all potentially valid reasons and should be considered when making a leasing decision):
- Uncertain about fair market value residuals
- Not sold on the benefits of leasing
- Prefer to build equity
- Place a high value on "Pride of Ownership"
- Uncomfortable with complicated leasing agreements
How is a lease structured?
Leases usually require the following:
- One or two advance payments
- A security deposit (normally refundable) equal to one or two monthly payments
- Requirements that the Lessee return the equipment at lease termination in an acceptable mechanical condition
- Hour limitations and excess hour charges, which protect the Lessor against excessive use
What credit criteria must a leasing customer meet?
Because a finance company assumes more risk on a lease, customers must meet more stringent credit criteria:
- Must be in business for a minimum of three years
- Must provide a minimum of two years of financial statements
- Statements must show positive net worth, profitability, and sufficient cash flow to honor all obligations
- Comparable lease or financing experience
- Proven equipment maintenance record
What are the basic types of leases available?
Four of the most common names used in our industry are:
Lease with a $1 Purchase Option: Essentially the equivalent of a conditional sales contract purchase:
- On-balance sheet financing
- Ownership and depreciation benefits for Lessee
- Low initial cash outlay
- Principal portion of monthly payment cannot be expensed
Finance Lease: Contains a bargain purchase option or does not meet IRS or accounting criteria for an Operating Lease:
- Same basic characteristics as the $1 Purchase Option Lease, with lower monthly payments
Operating Lease: Meets both IRS and accounting criteria for a lease, including: no automatic ownership transfer to Lessee at the end of the lease, no bargain purchase option, the lease term does not run longer than 75 percent of estimated economic life of the equipment, and the present value of minimum lease payments does not exceed 90 percent of the original purchase price of the equipment. Also:
- Off-balance sheet financing to preserve bonding capacity
- Monthly payment can be expensed
- Low initial cash outlay
- Protection against product obsolescence
Fair Market Value Lease: A lease without a predetermined end-of-lease purchase option, which may or may not qualify as an Operating Lease. The characteristics of this lease are determined by its ability to meet IRS and accounting standards as outlined above.
What type of leasing does Power and Komatsu Financial offer?
Komatsu Financial offers all of the previously mentioned types of leases, as well as the unique Komatsu Financial Advantage Lease.
The Advantage Lease
The Advantage Lease program is designed to meet IRS and accounting criteria to qualify as an Operating Lease, (consult your tax advisor) while also providing the security of predetermined purchase options, return provisions, and renewal options. Monthly lease expenditures and purchase and renewal options are determined at the outset. Terms and conditions are clearly spelled out. But the key advantage of this program is the wide range of options offered:
- Option One: First Purchase Option
At the end of the initial lease term, you can purchase the unit for a predetermined option price. You can either pay cash or Komatsu Financial will provide fixed rate conditional sales financing.
- Option Two: Return Option
At the end of the initial lease term you can return the equipment to Komatsu Financial under the conditions spelled out in the lease agreement.
- Option Three: Renewal Options
At the end of the initial lease term you can extend your lease term for 12 months at a lower monthly payment, determined when you originally signed the lease.
- Option Four: Second Purchase/ Return Option
At the end of the lease extension, you can either purchase the equipment for cash at the predetermined price, or return it to Komatsu Financial.
Another key advantage is that you do not have to choose an option until 60 days before your lease termination date, allowing you to make a decision based on market conditions.
How do you know which option is right for you?
A professional tax advisor can help you identify the most cost-effective means of obtaining equipment. Once that decision is made, Komatsu Financial and Power can help you match those goals to a Komatsu Financial lease program.
Remember that every transaction is different. You should always consult your tax advisor to determine the benefits that leasing can offer.
For more information about Komatsu Financial's leasing programs, Click Here...