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Glossary of Lease Financing

Add-on  see Interest.

APR - annual percentage rate, a name which in itself is misleading, this rate divided by the number of payments per year times the remaining principal balance to determine the portion of a payment applied to the interest, the balance of the payment is deducted from the principal; not to be confused with annual yield. To be fully accurate it must include all related fees and charges.

Asset - A useful or valuable quality, person, or thing; an advantage or a resource: The property owned by a person, especially a bankrupt that can be used to settle debts.

Asset Base - A transaction based on a tangible asset.

Borrowing - To obtain or receive (something) on loan with the promise or understanding of returning it or its equivalent. Obtaining the use of money for a period of time. There is an obligation to repay the amount borrowed, generally with a periodic cost. The cost is commonly known as interest.

Capitalized Lease or Lease Purchase - a lease with terms dictating it be treated as a loan for tax and accounting purposes.

Equipment Financing Agreement (EFA) - A type of loan similar to a lease in initial cash outlay providing the gratification and liabilities of, ownership of, but lacking the reduction of tax liability afforded by a lease. Often used in refinancing to keep cash outlay low while avoiding double taxation. When required by lessors, it is generally to avoid potential liabilities arising from especially dangerous equipment or equipment involving hazardous waste materials.

Interest - a.  A charge for a loan, usually a percentage of the amount loaned; b.  An excess or a bonus beyond what is expected or due. There are two types of interest rates used in equipment acquisition.  Add-on - this rate times the principal times the term in years produces the total interest cost to the borrower.

Lease - A contract granting use or occupation of property during a specified period in exchange for a specified rent. Variant of Old French laissier, to let go. There are a number of different types of equipment leases defined by accountants and attorneys as their understanding for accounting, legal, and tax purposes.

Leaseback - A business arrangement whereby property is simultaneously sold and leased back to the seller for usually long-term continued use. Also called sale and leaseback, sale-leaseback. A means of re-acquiring working capital, these types of transactions normally require assets significantly higher than the sale price and the lease rates are generally higher than a normal lease.

True Lease - a non-cancelable rental agreement in which the lessee is required to return the subject equipment to the lessor at the end of the term. The lessor often offers the lessee the option of renewing the lease or purchasing the equipment for its then fair market value. May be treated as a capitalized lease or operating lease depending on the terms and financial condition of the lessee.

Operating Lease - a lease meeting the Financial Accounting Standards Board (FASB) requirements for an off-balance sheet transaction. The most difficult of which is the rule requiring that the net present value of the rental payment stream does not exceed 90% of the capitalized cost of the equipment at the lessee's internal rate of return or incremental borrowing rate. If this condition is met, the next hurdle is: does the lessee have the right to purchase the equipment at the end of the lease at a bargain purchase price.

Statutory Finance Lease - any lease in which the lessor and the lessee agree that the lessor is not the manufacturer or the seller and does not have any obligations to the lessee for the performance of the equipment. This is a codification of the third party lease status.

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