Glossary

There is a great number of Leasing terminology, browse through our Leasing Glossary for an explanation of the different terms you will encounter and their meaning.

A

Accelerated Cost Recovery System (ACRS)

A method of tax depreciation which replaced the old “ADR class life” system. ACRS was applicable to most equipment placed in service after 1980 and before 1987. Under the Tax Reform Act of 1986, ACRS was replaced by the “Modified Accelerated Cost Recovery System (MACRS).

Acceleration Clause

Should a lessee default on a financial agreement an Acceleration Clause allows the lessor to make all future payments due immediately.

Add On

A transaction adding new, related equipment to an existing lease.

Advance Payments

Payments made by the lessee at the start of a lease.

Amortization

The gradual reduction of a debt by periodic payments large enough to meet current interest payments and to repay the principal at maturity. The loan is repaid through regular, monthly payments of principal and interest paid for a pre-determined amount of time. A breakdown of periodic loan payments into principal and interest portions.

Application

An initial statement of personal or company financial information that is required to approve your lease. To initiate an application conveniently go to our Application Page.

Appraisal

An opinion of the market value of an asset as of a specific date.

APR

The nominal or effective rate of interest for a specified period (usually a year). The “Annual Percentage Rate” is a yearly rate of interest. It includes fees and costs paid to acquire the loan. Required by law, vendors must disclose the APR. The APR is used to compare various loans available, making simple interest and compound interest loans comparable.

B

Balance Sheet

A financial statement that gives an accounting picture of property owned by a company and of claims against the property on a specific date. The left (debit) side of a balance sheet states Assets; the right (credit) side of a balance sheet shows Liabilities and owners’ equity. The two sides must be equal (balance). The balance sheet is like a snapshot of the position of a company or individual at one point in time.

Balloon Payment

A final lump sum payment made at the end of certain types of leases the payment of which satisfies the debt.

Bargain Purchase Option

This is much like a purchase option but it gives the lessee the right to purchase the leased item for a price less than it’s estimated fair market value, so that, at the inception of the lease, purchase appears to be reasonably assured. This term is used the help classify a lease for accounting purposes.

C

Capitalized Cost

The total amount of value for the equipment upon which a lease is based, similar to the selling price of a truck you purchase.

Capitalized Cost Reduction

The amount paid in cash or trade-in at the inception of a lease, similar to a down payment.

Capital Lease

A lease that must be reflected on the company balance sheet as an asset and corresponding liability. Generally, this applies to leases where the lessee acquires essentially all of the economic benefits and risks of the leased property. Contrast with Operating Lease. A Capital Lease is treated by the lessee as both the borrowing of funds and the acquisition of an asset to be depreciated; thus the lease is recorded on the lessee’s balance sheet as an asset and corresponding liability (lease payable). Periodic lessee expenses consist of interest on the debt and depreciation of the asset.

Capped Fair Market Value Lease

A Fair Market Value Lease with a predetermined ceiling to limit Fair Market exposure at the end of the lease term.

Certificate of Acceptance

A formal document giving verification by the lessee that they have received the property leased.

Closed End Lease

A lease for which the amount representing the residual value of the equipment at the end of the lease is mutually agreed upon within the lease. Risk of depreciation greater than anticipated is born by the lessor, the company leasing the equipment.

Compensating Balance

When banks loan, they often require that you keep a compensating balance in your checking account. These funds are used to pay for bank services. The balance offsets bank expenses in servicing the loan or credit line. The bank may call for 10 and 5 compensating balances. This means that you must have available 10% of the credit line at commitment time and in addition an extra 5% when you draw against the credit line.

Coterminous

Two or more leases that are linked so that payments are due at the same time monthly and the lease transactions will terminate at the same time.

Cross Corporate Guaranty

The guarantee made by one corporation to fulfill the lease obligations of another corporation.

D

Depreciation

A tax deduction representing a reasonable allowance for exhaustion, wear and tear, and obsolescence, that is taken by the owner of the equipment and by which the cost of the equipment is allocated over time. Depreciation decreases the company’s balance sheet assets and is also recorded as an operating expense for each period. Various methods of depreciation are used which alter the number of periods over which the cost is allocated and the amount expensed each period.

Direct Finance Lease

See Capital Lease. Used as an accounting classification, it applies only to the lessor.

Discount Rate

A certain interest rate that is used to bring a series of future cash flows to their present value in order to state them in current, or today’s, dollars. Use of a discount rate removes the time value of money from future cash flows.

Dollar Buyout

The option to purchase the leased property, at the end of the term, for one dollar.

Down Payment

Down Payment is the amount one pays for property or goods in cash in addition to the debt incurred. The difference between the loan amount and the purchase price, usually paid immediately upon purchase in the form of cash or trade-in value.

E

Escrow

A process within a transaction in which a neutral third party carries out the procedures necessary to transfer ownership of an item.

Estimated Useful Life

The Estimated Useful Life or Economic Life is the period during which an asset is expected to be useful in trade or business.

Used for purposes of calculating the maximum allowable term of a tax lease.
Used for determining whether or not the lease is a Capital Lease.
Used to determine the method of depreciation for a capitalized leased asset.
May or may not be the same as the life used for income tax purposes.

F

Fair Market Value

The price for which property can be sold in an “arms length” transaction; that is, between informed, unrelated, and willing parties, each of which is acting rationally and in its own best interest.

Fair Market Value Lease

A lease which includes an option for the lessee to either renew the lease at a fair market value renewal or purchase the equipment for its fair market value at the end of the lease term. Though often referred to as tax leased, not all Fair Market Value Leases qualify as tax leases.

Finance Lease

A lease used to finance the purchase of equipment; not a true lease. Finance leases are generally considered to be capital leases from an accounting perspective and non-tax leases from a tax perspective.

Financial Accounting Standards Board

FASB is a seven member independent board, based in Norwalk, Connecticut, that sets accounting rules for certified public accountants. Organized in 1973, its Statement of Financial Accounting Standards is the basis for GENERALLY ACCEPTED ACCOUNTING PRINCIPLES.

Financial Accounting Standards Board 13

Statement number 13 of the Financial Accounting Standards Board (FASB) that establishes standards for lessees’ and lessors’ accounting and reporting for leases. This includes the characterization of a lease as an operating lease or capital lease for the lessee’s purposes. A company’s assets, liabilities and net income will differ depending on how it chooses to structure its leases. The provisions of FASB 13 derive from the view that a lease that transfers substantially all of the benefits and risks of ownership should be accounted for as the acquisition of an asset and the incurrence of an obligation by the lessee (a capital lease) and as a sale or financing by the lessor. Other leases should be accounted for as the rental of property operating leases).

Financial Statements

Written record of the financial status of an individual, association or business organization. The financial statement includes a Balance Sheet and Income Statement (or operating statement or profit and loss statement) and a Statement of Cash Flows.

Fixed Purchase Option

An option given to the lessee to purchase the leased equipment from the lessor on the option date for a guaranteed price. Both the date and the price must be determined at the inception of the lease. A typical fixed purchase option is 10% of the original cost of the equipment.

Full Payout Lease

A lease in which the total of the lease payments pays back to the lessor the entire cost of the equipment including financing, overhead, and a reasonable rate of return, with little or no dependence on a residual value.

G

Gross Income

For qualifying purposes, the income of the borrower before taxes or expenses are deducted.

H

Home Equity Line of Credit

A loan providing you with the ability to borrow funds at the time and in the amount you choose, up to a maximum credit limit for which you have qualified. Repayment is secured by the equity in your home. Simple interest (interest-only payments on the outstanding balance) is usually tax-deductible. Often used for home improvements, major purchases or expenses, and debt consolidation.

Home Equity Loan

A fixed or adjustable rate loan obtained for a variety of purposes, secured by the equity in your home. Interest paid is usually tax -deductible. Often used for vehicle purchases, home improvement or freeing of equity for investment in other real estate or investments. Recommended by many to replace or substitute for consumer loans whose interest is not tax-deductible, such as auto or boat loans, credit card debt, medical debt, and education loans.

I

Income Statement

A financial statement that gives operating results, such as net income and loss and depreciation, for a specific period. Also referred to as earnings report, operating statement and profit and loss statement.

Interest Rate

The periodic charge, expressed as a percentage, for use of credit.

Investment Grade Credit

Term used to describe a lease applicant with a high credit rating.

Invoice Price

The manufacturer’s initial charge to the equipment dealer. This invoice price can include freight charges. This price may not reflect your dealers’ final cost due to rebates, billing terms, allowances, discounts and incentives the dealer may receive.

L

Lease

A contract giving the right of possession and use of an asset for a specified period in exchange for payments. The party owning the leased property is the lessor, the party using it is the lessee, and the lease payments are rentals. A lease contract may be written for a single piece of equipment, or it may be a Master Lease governing a continuing arrangement, regardless of the equipment leased. There are several commonly used types of leases. See tax-oriented lease or True Lease.

Lease Line

Similar to a line of credit. It lets the lessee add additional leased items without needing additional agreements.

Lease Purchase

Full payout, net leases structured with a term equal to the equipment’s estimated useful life. Because many Lease Purchases include a bargain purchase option for the lessee to purchase the equipment for one dollar at the expiration of the lease, these leases are often referred to as dollar buy-out or buck-out leases. Lease Purchases are generally considered to be Capital Leases from an accounting perspective and non-tax leases from a tax perspective due to their bargain purchase option and length of lease term.

Lease Rate Factor

This is a number use to determine the monthly or periodic payment. It is a fractional (percentage) number when multiplied by the cost of goods will give the payment. Factors are a function of the length of the lease term. Shorter terms (24 months) will have a higher factor than longer terms (60 months). Factors are a useful tool for either the lessee or sales person to determine the payment required or the maximum amount available for a given budget.

Lease Schedule

A schedule to a Master Lease agreement describing the leased equipment, rentals and other terms applicable to the equipment.

Lease Term

The Lease Term is the period of time during which the conditions of the lease will be carried out.

Lessee

The party to a lease agreement who is obligated to pay the rentals to the lessor and is entitled to use and possess the leased equipment during the lease term.

Lessor

The party to a lease agreement who has legal or tax title to the equipment (in the case of a true tax lease), grants the lessee the right to use the equipment for the lease term and is entitled to receive the rental payments.

Letter of Credit (L/C)

A document issued by a bank that guarantees the payment, for a specified time period, of a customer’s drafts up to a stated amount.

Lien

A claim against an item by another party that utilizes that item as security for repayment of a loan or other claim. A lien affects the ability to transfer ownership.

Loan to Value Ratio (LTV)

A ratio determined by dividing the sales price or appraised value into the loan amount, expressed as a percentage. For example, with a sales price of $10,000 and a loan of $8,000, your loan to value ratio would be 80%.

Lock or Lock In

A commitment you obtain from a lender assuring you a particular interest rate or feature for a definite time period. Provides protection should interest rates rise between the time you apply for a loan, acquire loan approval, and, subsequently, close the loan and receive the funds you have borrowed.

M

Master Lease

A Master Lease agreement allows for several smaller leases to be incorporated under one umbrella. The master lease is a continuing arrangement, regardless of the equipment leased.

Middle Market Credit

Generally a company that does not have Investment Grade Credit but with sales greater than $50 million annually.

N

Net Lease

Any lease where, in addition to the payment required, the lessee pays such expenses such as taxes, insurance and maintenance. Capital leases are usually net leases.

O

Open End Lease

A lease for which you, the lessee, must pay any difference between the residual value of the equipment agreed upon within the lease and the fair market value, if lower, of the equipment at the end of the lease. Risk of depreciation greater than anticipated is born by the lessee.

Operating Lease

An Operating Lease is the type of lease, normally involving equipment, whereby the contract is written for a much shorter period of time than the life of the equipment and the lessor handles all maintenance and servicing. This can also be called a service lease. Operating leases are the opposite of Capital Leases, where the lessee acquires essentially all the economic benefits and risks of ownership.

P

Personal Guaranty

The guarantee of an individual who will take responsibility for the obligations of a lease. For Subchapter S, small businesses and closely held companies a Personal Guarantee may be asked for to make sure the payments are made.

Present Value

Present Value is today’s value of a future payment, or stream of payments, discounted at some appropriate compound interest, or discount, rate; also called time value of money. Today’s value of a stream of cash flows is worth less than the sum of the cash flows to be received or saved over time.

Purchase Option

The right, but not obligation, to buy at the termination of a lease. The amount or method of valuation being specified in the lease. Also the purchase option is the buy out fee that is attached at the end of the term of the lease. It allows for the transfer of title (UCC-1 form) for the equipment to be put in your name.

R

Refundable Security Deposit

A non-taxable amount received by a lessor to be held for the term of the lease to insure compliance with the terms for payment. It is refunded to the lessee upon completion of the obligation.

Remarketing

The selling or re-leasing of leased property that has been turned in to the lessor at the end of a lease term or reclaimed as a consequence of a default

Rent Holiday

Certain lease conditions that allow for a period when payment is not required.

Residual Value

The amount agreed upon to represent the value of the equipment at the termination of a lease, usually determined by the amount of depreciation in the equipments value predicted during the term of the lease.

Rule of 78’s

The Rule of 78’s is the mathematical formula used in computing the interest rebated when a borrower pays off a loan before maturity. Sometimes known as the Sum of the Digits. Some lease companies ask you pay the sum of the outstanding payments when you want to pay off. The Rule of 78’s is a fair and objective method of calculating the pay-off balance and costs you less

Running Rate

A lease running rate is similar to the interest charged for a loan and is expressed as a percentage or factor. It varies depending on several key criteria. The running rate is primarily determined by the quality of credit, amount requested and the length of the term. Other factors sometimes come into play and can be different for each lease.

S

Sale and Leaseback

The sale of an asset, equipment or real estate, and agreement to lease it back from the purchaser on a long-term basis. In commercial finance, this type of financing arrangement strengthens the sellers’ balance sheet, because a capital asset is sold and converted into cash or a receivable. It may, however, result in forfeiting of depreciation and tax benefits.

Security Interest

An interest in real property or personal property that secures the payment of an obligation. It allows the holder of the security interest to obtain the property in the event of a default. It is either consensual (by agreement) or enforced by law as in a judgment or lien.

T

Tax Lease

A Tax Lease, or Tax Oriented Lease often called a True Lease, gives the lessor the tax benefits of ownership, transferring the use of tax depreciation deductions, and in some cases, investment tax credits, from the lessee to the lessor in exchange for lower rental payments. All other leases are non-tax leases and are treated as conditional sales contracts for tax purposes. On the lessor’s books a lease is treated very much like a loan. Thus, the lessee can deduct only the interest portion of the rentals.

Term

Term refers to the period of time during which the conditions of a contract will be carried out and are in force.

True Lease

A True Lease, or often called a Tax Oriented Lease, gives the lessor the tax benefits of ownership, transferring the use of tax depreciation deductions, and in some cases, investment tax credits, from the lessee to the lessor in exchange for lower rental payments. All other leases are non-tax leases and are treated as conditional sales contracts for tax purposes. On the lessor’s books a lease is treated very much like a loan. Thus, the lessee can deduct only the interest portion of the rentals.

U

UCC1

The UCC1 statement (or financing statement) is a document filed with a lender detailing property taken as collateral from a borrower. It is a standard document under the Uniform Commercial Code and is filed with the secretary of state or other designated public official. The document is time stamped, the filing date is noted, and a file number is assigned, securing the lender’s claim to the assigned collateral.

Underwriting

The process of verifying data and approving a loan.

Upside-down

A situation that occurs when the value of your equipment is lower than the outstanding balance of the loan secured by the equipment.

Use Tax

Essentially the same as a sales tax but not paid all at once. The Use Tax is spread out over the term of the lease and incorporated into the payments

V

Vendor

A seller, supplier or retailer that provides leased property to customers.

Vendor Leasing

Generally an exclusive relationship between a lessor and vendor. The leasing company (lessor), in some ways, acts as the finance department of the vendor, doing credit checking, billing and collections. This provides additional value added service to the customer and vendor yet the leasing company accepts the financial risks.