Types of Heavy Equipment Lease Financing
Manufacturing companies have a variety of options when it comes to funding a heavy equipment. Apart from the various options to finance, these companies also get benefits from the increasingly competitive lending practices. However, many businesses choose to lease construction equipment instead of buying it and financing it with a loan. Heavy tool leasing is one of the most popular practices among business owners.
The difference between leasing and buying is the fact that when a company buys a heavy machine and finance it with a loan, the company ends up owning the tool. Through the loan, one will be allowed to spread the tool payment over an agreed period. The company will be expected to pay principal and interest as agreed.
A lease, on the other hand, allows a business enterprise to rent a tool for a particular period. The most common length of time allowed varies between two to five years. The interest charged ranges from 6 to 16 percent. The business does not claim ownership of the tool as is the case with buying. However, one is entitled to receiving benefits and drawbacks of ownership even though they do not own the furniture.
Three Major Types of Leases
The first type of lease is the Fair Market Value Lease (FMV). One will be expected to make monthly rental payments to access and use the construction tool. After the leasing period has expired, one is provided three option. They may decide to buy the tool its fair market value, renew the lease, or return the property back to the leasing company. Small businesses do not enjoy benefits or responsibilities of ownership under this type of rental. The tool is not indicated as an asset on the firm’s balance sheet.
A $1 Buyout Lease is a contract whereby the business owner will be expected to make rental payments on a monthly basis to access and use the tool. At the expiry of the leasing period, one is provided with the option to buy the machine for one dollar. Businesses are provided with benefits and responsibilities of ownership under this lease. The amount paid on the monthly basis is slightly higher than what is paid under the Fair Market Value Lease. The $1 Buyout Lease is suitable for businesses that are certain of owning the tool after the leasing period has expired. Also, when the tool has a long half-life, it is economical to opt for the $1 Buyout Lease instead of the Fair Market Value Lease.
The 10 Percent Lease also works in a similar manner to the $1 Buyout Lease. The lease offers an affordable purchase cost at the end of the leasing period. One is allowed to buy the tool at the end of the rental period for 10 percent of its fair market value. The firm is treated as the owner of the big machine. The main advantage of the Ten Percent Lease over the $1 Buyout Lease is the fact that the ten percent option provides a smaller monthly payment. Factors such as the criteria used to approve the equipment lease should be considered.