A term loan is debt financing with equal monthly payments including principle and interest that amortize generally from 24 to 84 months. (i.e. traditional car loan or mortgage payments) These loans can be fully amortizing, or in some cases, an arrangement for balloon payment can be made.
Equipment Finance Agreement (EFA)
An EFA is a debt instrument similar to a traditional term loan with equal monthly payments that include principle and interest fee; however, EFA’s are not quoted with a stated rate but rather a rate factor. This allows the borrower to calculate their monthly payment instantly should the underlying asset or its price change before closing. EFA payments do not amortize like a traditional term loan, instead each payment consists of equal principle amounts and interest fee. In this regard, it can be described as a loan that acts like a lease payments.
A lease in which the Lessor (leasing company) gives exclusive rights to a Lessee to use and possess its equipment for a specified period. Capital Leases typically have a $1 purchase option at the end of the lease and are considered to be debt for accounting purposes.
Any of the following conditions being met in an equipment lease would make it a Capital Lease:
A TRAC Lease (terminal rental adjustment clause) is specific to over-the-road titled vehicles and equipment (trucks, trailers, truck cranes, etc.). In a TRAC lease, the lessor and lessee agree upon a defined residual value before the lease begins that is guaranteed by the Lessee. The Lessee has the option to purchase the equipment at the end of the required lease term for the agreed upon residual value or return the asset to the Lessor.
True Lease / Operating Lease / Tax Lease
A True Lease is also referred to an operating or tax lease. It is an off-balance sheet lease, and lessee is required to make monthly rental payments to the lessor. This is beneficial for companies only needing the equipment for a certain amount of time, or is need of minimizing the amount of debt shown on its books. At the conclusion of the true lease term, the lessee has the option to return the equipment, renew the lease and keep the equipment, or purchase the equipment at Fair Market Value (FMV).
If you are looking for ways to free up the equity you have in your equipment without divesting it, the sale leaseback is your opportunity. We can arrange a sale of your existing equipment, where you gain access to its equity, and then lease it back until you’re ready to upgrade and move on.
For more information about all our equipment leasing and financing options, contact us today. Our associates can answer questions to help you decide on the best options for financing your next equipment purchase. They can even help you start an application over the phone.