"Application-Only" Credit Review
Some Lessors grant credit using only the information submitted to them on Lease Applications. This data, along with input from bank and trade references and independent credit bureau reports, is used to review credit up to certain transaction size limits (usually less than $50,000). For these Lessors, decision-making is generally aided by the use of "Credit Scoring" systems and written financial statements are not required from the applicant.
 

Accelerated Cost Recovery System (ACRS)
The tax depreciation, or cost recovery, method for Internal Revenue Service purposes that governs all depreciable property placed in service between January 1, 1981 and December 31, 1987. Introduced by the 1981 Economic Recovery Tax Act, ACRS replaced the Asset Depreciation Range (ADR) system and was replaced itself by the Modified Accelerated Cost Recovery System (MACRS) of the 1986 Tax Reform Act.
 

Accelerated Depreciation
Any depreciation method that allows for greater deductions or charges in the earlier years of an asset's depreciable life, with charges becoming progressively smaller in each successive period. Examples of accelerated depreciation are the double declining balance and sum-of-the-years digits methods.
 

Acceptance Certificate
When leased equipment is delivered and installed, the Lessee typically authorizes the Lessor, in writing, to pay for it. The Lessee's authorization to pay the supplier is indicated on an Equipment Acceptance Certificate form.
 

Accounts Receivable Financing
Many businesses sell to customers on terms or on an open account basis. The outstanding invoices payable by customers are salable or assignable business assets. Often, businesses sell or pledge Accounts Receivable to Factors or Accounts Receivable Financing specialists to raise capital or to accelerate the receipt of cash. Many of these same businesses use Leasing for the acquisition of equipment.
 

Add-On
A transaction to add related equipment to an existing lease. Typically, this term is used when the new equipment is financed using the same end of term structure as was used in the underlying transaction (e.g., Fair Market Value, $1.00 Purchase Option) and the add-on's lease term will terminate on the same date as the original transaction.
 

Advance Lease Payments
Many leasing transactions call for one (1), two (2), or more payments in advance. As a rule, when Advance Payments are required for more than just the first periodic payment, the additional Advance Payments will apply to payments due at the end of the Lease. If payments are made monthly, for example, one Advance Payment will apply to the first month's payment while any additional Advance Payments will be applied to payments due at the end of the lease term. Advance Payments are payable at, or prior to, lease inception.

Note: Under certain circumstances, lease agreements can be structured that call for "Payment in Arrears". In this case, no advance payments will be required at lease inception, and lease payments are payable at the end of each lease period during the term
 

Alternative Minimum Tax (AMT)
An alternative, separate tax calculation based on the taxpayer's regular taxable income and increased by the taxpayer's preferences for the year. Among the preferences that can increase the taxpayer's alternative minimum taxable income is the accelerated portion of depreciation. After certain exemptions and offsets, the taxpayer is required to pay the larger of the regular tax or the alternative minimum tax.
 

Amortization
For accounting or tax purposes, amortization refers to the distribution of the cost of an asset over its useful life. Alternatively, amortization can refer to the process of reducing a debt obligation through periodic level payments that include both an interest and principal portion.
 

Annual Percentage Rate (APR)
The effective interest rate over the course of a year, taking into account compounding and other fees.
 

Application Form
Most Lessors use a Lease Application Form to list the information required to evaluate a prospective Lessee's credit condition and history.

Application forms call for specific information about the applicant, such as, but not limited to:

• Exact Legal Name of the Business

• Type of Organization - Proprietorship, Partnership, Corporation

• State of Incorporation

• Number of Years in Business

• Nature of Business

• Principal(s)/Owner(s) Information - Name, Home Address, SSN#

• Bank(s)/Trade Reference(s)

• Equipment Supplier Information and Detailed Equipment List.

Additional Lease Application Information: For equipment costing more than $50,000, accountant prepared financial statements or federal income tax returns will usually be needed. At times, the owner's personal financial statement, tax returns, or bank reference may also be required. Credit criteria and financial information requirements vary and are individually established by lessors in their own discretion.
 

Appraisal
An evaluation of the value of a specific item of property, usually conducted by a person with expertise with respect to such property.
 

Appreciation
The increase in value of an asset over time.
 

Asset
An item of value.
 

Assignment
Lease Agreements generally contain a provision permitting the Lessor, or other type of Lender, to transfer the Lease to another party by "Assignment". Most often; Lessors employ their own documents utilize assignment provisions to sell transactions to funding sources. Terms and conditions for assignment vary regarding recourse and other provisions such as the right, title and interest in the equipment financed.
 

Audited Financial Statements
An audit is a methodical and objective examination of accounts and items that support the financial statements of the company. It requires the CPA to study the association's accounting system and evaluate the risk of misstatement from error or fraud. An audit also requires the CPA to test the books and financial records to see if they are producing reliable financial data. Unlike a review, an audit requires the CPA to vouch numbers to source documents, confirm balances or other information, trace transactions through the records. An audit is more work and provides a greater degree of assurance that the financial statements are "fairly stated in accordance with generally accepted accounting principles."
 

Authorized Signature
A signature by a person authorized by a company to obligate the company on a long-term lease. An authorized signer will usually be substantiated by the Corporate Resolution which specifies who can sign and what his/her responsibilities may be.
 

Balloon Payment
A payment on a lease that is large in comparison to the other payments. A balloon payment is usually the last payment on the lease.
 

Bargain Purchase Option
A lease provision allowing the lessee, at its option, to purchase the leased property at the end of the lease term for a price that is sufficiently lower than the expected fair market value of the property.
 

Bargain Renewal Option
A lease provision allowing the lessee, at this option, to renew the equipment lease for a rental rate predetermined at lease inception, that is substantially lower than the expected fair market value at the date the option can be exercised.
 

Basis Points
Units of 1% with each unit equal to 0.01% (1/100%). For example, "50 basis points" is equal to .5% and "200 basis points" is equal to 2%.
 

Benefits of Leasing
Conserves Working Capital.
Provides 100% financing for equipment acquisitions.
Keeps existing bank and other lines of credit open.
Provides an additional line of credit for equipment acquisitions.
Helps to overcome budget restrictions and limitations.
Helps to maximize cash flow.
Does not require down payments.
May provide tax savings.
May provide off balance-sheet financing.
Provides specific Equipment, chosen by the Lessee.
Provides equipment acquired from suppliers chosen by the Lessee.
Protects against operating obsolete equipment.
Hedges against inflation through fixed monthly payments.
Flexible financing that can be matched to specific customer needs
 

Book Value
For accounting purposes, the value of an asset according to depreciation schedules which may or may not be market value.
 

Broker
A broker acts as the middle-man between the lessee (the user of the equipment) and the full service leasing company that ultimately provides the credit approval, documentation, funding, and billing. There are many leasing companies that act as brokers and receive a fee for their work. There are fewer full service leasing companies that have the ability to hold and service their leases throughout the entire term of the lease. The full service lessor provides greater control for the lessee and/or vendor in the event the lessee wants to upgrade or early terminate their lease. Since there is no middleman, doing business directly with a full service lessor usually results in a lower lease rate for the lessee and a higher sale price for the vendor.
 

Budgets
Most businesses use "Budgets" to forecast and allocate expenditures for specific periods of time. Typically, Capital Budgets include allocations for equipment acquisitions, while Operating Budgets apply to the periodic expenses incurred in running a business. Often, when Capital Budgets are exhausted, or have been allocated for other purposes, businesses can use available funds from Operating Budgets to lease needed equipment. Since Lease Payments are typically made monthly, and are small in comparison to the full outlay of the equipment's purchase price, businesses can "stretch" their equipment acquisition power by leasing
 

Capital Lease
If long-term ownership of the equipment is your goal, a capital lease might be your best choice. It would be categorized on your balance sheet just like a bank loan, with deductible interest expense on your income statement. But, at the end of your lease, you can purchase the equipment for a modest sum. Most purchase options range from $1 to 10% of equipment cost.
 

Cash & Cash Equivalents
The value of assets that can be converted into cash immediately. Usually includes bank accounts and highly liquid, marketable investments which can be easily converted into cash, such as Treasury Bills and money market funds. Cash equivalents on balance sheets include securities (e.g., notes) that mature within 90 days.
 

Cash Flow
Cash Flow is a critical measure of a business' ability to meet lease obligations. Cash Flow is calculated by adding the business net income to its depreciation expense for a particular period (i.e. month, quarter, year), and subtracting the current portion of long term debt. The remainder of this formula is the available cash to "service" new lease obligations.
 

Certificate of Delivery and Acceptance
A written verification by the lessee that they have received the equipment to be leased and have accepted the equipment after full inspection thereof as satisfactory for the purpose of the lease. Most leases begin after the date stated on the certificate of acceptance.
 

Certificate of Insurance
A statement from an insurance company or its agent that a certain policy has been written. The certificate usually summarizes the coverage of a certain policy.
 

Closed End Lease
A true lease in which the lessor assumes the depreciation risk. The lessee bears no obligation at the end of the lease. This term is used to distinguish the lease from an open-end lease.
 

Compiled Financial Statements
A compilation is the presentation, in the form of financial statements, of the representations of the owners or managers with no assurance made by the CPA. An accountant generally performs few, if any, procedures, and it is substantially less than a review services report. For this reason, the accountant's compilation report will include wording similar to the following: "A compilation is limited to presenting in the form of financial statements information that is the representation of management. We have not audited or reviewed the accompanying financial statements and, accordingly, do not express an opinion or any other form of assurance on them."
 

Conditional Sales Contract
An agreement for the purchase of an asset in which the lessee is treated as the owner of the asset for federal income tax purposes (thereby being entitled to the tax benefits of ownership such as depreciation), but does not become the legal owner of the asset until all the terms and conditions of the agreement have been satisfied.
 

Contingent Liabilities
Liabilities which are difficult to quantify, or which may or may not come to pass, such as outstanding lawsuits.
 

Corporate Resolution/Certificate of Secretary
A Corporation must attest that the individual executing a Lease Agreement on its behalf is duly authorized to do so. A signatory's authority is commonly confirmed by the execution of a "Corporate Resolution" or "Certificate of Secretary". On this form, the Corporate Secretary, or other authorized officer, attests that the signatory is empowered, by name or title, to execute Lease Agreements for the Lessee. The Lessee's "Corporate Seal" is ordinarily required to be affixed to these forms, as well.
 

Cost of Capital
The weighted-average cost of funds that a firm secures from both debt and equity sources in order to fund its assets. The use of a firm's cost of capital is essential in making accurate capital budgeting and project investment decisions.
 

Cost Of Goods Sold
The total cost of purchasing raw materials and manufacturing finished goods. Equal to the beginning inventory plus the cost of goods purchased during some period minus the ending inventory.
 

Coterminous
Two of more leases that end at the same time. A Coterminous Addendum can be used allowing you to add equipment to an existing lease, adjusting the payments to reflect the addition. Both the original lease and the addendum will terminate at the same time.
 

Credit Scoring
Credit Scoring systems typically formulate values assigned to various credit criteria to create a "Pass/Fail" scoring "Model". Leasing applicant's scores are then compared to appropriate Models to determine credit acceptability. Credit Scoring Models are generally derived from the particular Lessor's historical portfolio performance with Lessees of similar type, organizational structure, credit history, size, age, and credit bureau rating, along with other criteria an individual Lessor may choose to include. Lessor's equipment preferences ordinarily result from that Lessor's particular experience, or inexperience, with various equipment types. Scoring criteria vary, predicated on transaction size, type of business, and individual Lessor's particular preferences. Credit criteria and financial information requirements are individually established by Lessors in their own discretion. Beacon Funding provides the flexible standards needed by most applicants.
 

Cross Corporate Guaranty
A guarantee by one corporation to pay the lease obligations of another corporation.
 

Current Assets
Value of cash and cash equivalents, accounts receivable, inventory, marketable securities, prepaid expenses, and other assets that could be converted to cash in less than one year.
 

Current Liabilities
The sum of all salaries, interest, accounts payable and other debts due within one year.
 

Default
A Default is the failure of a Lessee to meet an obligation(s) called for in a Lease, most commonly a delinquent payment.
 

Depreciation
A method for determining the useful life of a piece of equipment and for costing its value over the years of its active use. The total depreciation expense is equal to the difference between the initial cost of the unit and its estimated residual or salvage value. When divided over the years of the equipment's usefulness, this periodic expense can be deducted from income taxes each year.
 

Direct Finance Lease
A non-leveraged lease by a lessor (not a manufacturer or dealer) in which the lease meets any of the definitional criteria of a capital lease, plus certain additional criteria.
 

Discount Rate
An interest rate that is used to bring a series of cash flows to their present value in order to state them in current, or today's, dollars.
 

Documentation (Leasing Agreements and Paperwork)
Leasing terms and conditions are set out in written Lease Agreements, sometimes comprising several different forms. Documentation requirements vary, depending on the type of lease, equipment, equipment cost, number of units leased, equipment configuration, additional provisions (if any), and the particular contractual policies of individual Lessors. For example, Lessors of inexpensive equipment today commonly use one page, self-contained, Lease Agreement forms while more expensive equipment generally calls for more extensive contracts.
 

Dollar Buyout
Assuming that the lessee is not in default, an option at the end of the lease to buy the leased property for $1.00
 

Down Payments
Leases typically do not require Down Payments. Bank loans and other types of equipment based financing frequently require the borrower to pay 10 to 25 percent of the purchase price at the outset. Lessees with a minimal or negative credit history may choose to offer a Down Payment to get their lease approved.
 

Early Termination
The termination of a lease before the end of its original term. Depending on the lease structure, an Early Termination may have consequences such as a final payoff consisting of the sum of the remaining payments discounted at a nominal rate and a penalty.
 

Economic Life (Useful Life)
The estimated period of time, with normal repairs and maintenance, that equipment is expected to be economically usable for the purpose for which it was intended at the inception of the lease.
 

End-of-Term Options
Options stated in the lease agreement that give the lessee flexibility in its treatment of the leased equipment at the end of the lease term. Common end-of-term options include purchasing the equipment, renewing the lease or returning the equipment to the leasing company.
 

Equipment
The Equipment is the specific item(s) Leased by the Lessee as covered by a particular Lease Agreement.
 

Equipment Schedule
A document that describes in detail the equipment being leased. It may also state the lease term, commencement date, repayment schedule and location of the equipment.
 

Equipment Supplier (Vendor)
The "Equipment Supplier" is the seller/manufacturer of the equipment to be leased.
 

Equity
An ownership interest in property or a business.
 

Estimated Residual Value
For purposes of calculating the maximum allowable term of a "tax-oriented lease", this is the "fair market value" of the lease equipment at the end of the lease term, calculated in constant dollars excluding inflation or deflation.
 

Exemption Certificate
A document exempting a lessor from paying sales tax on the equipment being leased. A lessor may be buying the equipment for "re-sale" as would a vendor/supplier, while a lessee may be tax exempt for other reasons, i.e., non-profit entity or a bank.
 

Fair Market Value (FMV)
Price at which an asset or service passes from a willing seller to a willing buyer. Some leases contain purchase options that allow the lessee to purchase the equipment at the FMV at the end of the lease.
 

FASB 13
Statement issued by the Financial Accounting Standards Board establishing financial accounting standards for lessees and lessors. The provisions of FASB 13 state that a lease that transfers substantially all of the benefits and risks of ownership should be accounted for as the acquisition of an asset by the lessee and as a sale or financing by the leasing company (a Capital Lease). Other leases should be accounted for as the rental of property (Operating Leases).
 

Finance Lease
A lease in which the service provided by the lessor to the lessee is limited to financing equipment. All other responsibilities related to the possession of equipment, such as maintenance, insurance, and taxes are borne by the lessee.
 

Financial Statements
Accounting statements that provide specific information about a company's financial position. They include the Profit & Loss Statement, also know as the Income Statement, the Balance Sheet, and the Statement of Cash Flows. Financial statements can generally be audited by an outside CPA firm or be unaudited and, thus, prepared by the company.
 

Financing Statement (UCC-1)
A standardized form recorded with the Secretary of State and/or County Clerk to perfect a lien under the Uniform Commercial Code by notification to all interested parties. Used with some financing leases to protect lessor's interest in the equipment.
 

Fixed Purchase Option
An option given to the lessee to purchase the leased equipment from the leasing company 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.
 

Floating Rental Rate
Rental which is subject to upward or downward adjustments during the lease term. If the prime interest rate changes during the term of the lease, the rental rate may change to reflect this.
 

Full Payout Lease
A lease in which the total of the lease payments covers the entire cost of the equipment including financing, overhead, and a reasonable rate of return, so that there is little or no residual value
 

Gross Profit
Pre-tax net sales (gross sales minus returns, discounts, and allowances) minus cost of goods sold.
 

Guaranty (Personal/Corporate/Other)
At times, business owners (especially in the case of proprietorships, partnerships, closely-held corporations, or small businesses), may be required to personally guarantee a leasing transaction. In these cases, the appropriate party(s) will acknowledge his or her Guarantee on a separate Guaranty form, or in a separate Guaranty section of the Lease Agreement itself. At other times, a business may be a subsidiary of, or owned wholly, or in part by, another business. Depending on the circumstances, the Lessee's Parent company may be required to guarantee a leasing transaction.
 

Guideline Lease
A tax lease written under criteria or "guidelines" established by the IRS to determine the availability of tax benefits to the lessor.
 

Hell-Or-High-Water Clause
A clause in a lease that reiterates the unconditional obligation of the lessee to pay rent for the entire term of the lease regardless of any event affecting the equipment or any change in the circumstances of the lessee.
 

Incremental Borrowing Rate
The rate that, at the inception of the lease, the lessee would have incurred if it had borrowed funds over a similar term to purchase the leased asset.
 

Insurance
Most Lessors require the Lessee to insure the equipment against casualty loss, all risks, and require that the Lessee indemnify the Lessor against any liability incurred from the possession, operation, or usage of the equipment.
 

Interim Rent
Interim rent is a one-time daily rental charge for a period of time between the day the equipment is delivered/accepted and the first invoice date. It is a partial payment for using the equipment during a partial month, and will be billed to the lessee on the first invoice.
 

Investment Grade Credit
Generally refers to a lessee of high credit standing. Technically, an investment grade credit is a company rated highly by one of many recognized credit agencies such as Standard & Poor's.
 

Landlord/Mortgagee Waiver
A document wherein a landlord or mortgagee acknowledges that certain leased property on the premises is owned by a third party (the leasing company) and is leased to the tenant. In the waiver, the landlord or mortgagee agrees to not interfere with the leasing company's rights respecting the leased property.
 

Lease
A Lease is a transaction wherein a "Lessor" owns particular equipment and agrees to permit a "Lessee" to use it. Lease terms typically cover one to five or more years, depending upon the specific equipment's type and usage. Lessors ordinarily offer monthly payments but individualized payment structures can often be tailored to meet particular Lessee's accounting, cash-flow, or other financial requirements. Lease Agreements can often provide for the Lessee's purchase of the equipment at the end of the original lease term. Most often, the Lessee will select the specific equipment to be leased and choose the Vendor from whom that equipment will be purchased. The Lessor will then purchase the equipment on the Lessee's behalf.
 

Lease Agreement
The Agreement is usually a pre-printed form that contains the basic terms and conditions, including the equipment location and usage conditions, equipment insurance requirements, responsibility for taxes and fees, Default provisions, late payment provisions, remedies, Lessor's Assignment rights, equipment return provisions, indemnity, title to the equipment, and such other or additional provisions as determined by the Lessor and by law. The Lease Agreement also calls for input of the exact legal name and address of the Lessor and Lessee, a specific description of the equipment leased, the name and address of the equipment supplier, a schedule listing the term of the lease, the number and timing of Lease Payments, the amount of each Lease Payment, any applicable taxes payable, the number of Advance Lease Payments required, and any additional fees or costs to be paid by the Lessee.
 

Lease Line
A lease line of credit allows a leasing customer to obtain additional leased equipment under the same basic lease terms and conditions originally agreed to without having to renegotiate and execute a new lease contract with the leasing company. Each new piece of equipment is listed on a separate schedule, and the specific lease rate for that schedule is dependent upon the policies of the leasing company, the terms and conditions of the Master Lease, and the cost of the equipment.
 

Lease Payments
Most Lease Agreements call for a fixed periodic payment for a fixed period of time. Most leases require monthly payments in advance.
 

Lease Purchase
Full payout, net leases structured with a term equal to the equipment's estimated useful life. As 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 buyout" or "buck-out" leases. Lease Purchases are considered to be Capital Leases.
 

Lease Rate Factor
Numerical factor multiplied by total cost of equipment to compute periodic rentals.
 

Lease Rates
To simplify leasing payment calculations, leasing rates are typically stated as the number of dollars ($'s) charged per thousand dollars ($'s) of equipment cost leased, per specific period of time.

For Example,
In a five year (60 month) Lease that calls for a leasing charge of $24.00 per $1000 per month, the Rate Factor equates to .024.
To determine the payment for equipment costing $25,000:

 

Multiply $25,000 X .024 = $600 per month.

Leasing Rate Factors are based on various criteria such as: The then current money market costs, lease term, equipment cost, Purchase Option alternatives, lease type and structure, and any other variables applicable to particular lease configurations. For an estimate of a monthly payment, try our Lease Calculator.
 

Lease Term
The length of a lease, usually stated in number of months.
 

Leasing
Leasing is a tax oriented method of gaining the use of an asset that can produce more income or benefits than the cost. A lease can be a method by which a client can obtain either use and/or ownership of an asset while matching a payment schedule to a predetermined budgetary allotment.
 

Lessee
User of real estate, equipment, or other fixed assets for a specific period of time in exchange for payment.
 

Lessor
Provider/owner of equipment or other fixed assets for a specific period of time in exchange for the receipt of payment.
 

Level Payment
Equal periodic payments over the term of the lease.
 

Leverage
Leverage commonly applies to the amount of a business's Debt compared to its Tangible Net Worth or Stockholder's Equity.
 

Leveraged Lease
A lease wherein the stream of payments have a debt participant. The ownership of the leased equipment remains with the leasing company. Leveraged Leases can be either recourse or non-recourse leases.
 

Lien
A security interest or an encumbrance upon property.
 

Long Term Debt
Loans and obligations with a maturity of longer than one year; usually accompanied by interest payments
 

Long Term Lenders
Term typically used to describe the institutional lenders supplying debt (up to 80% of equipment cost) for leverage leases. Lenders receive no tax benefits from the lease but receive a fixed rate over a long term.
 

Master Lease
A continuing lease arrangement whereby additional equipment can be added from time to time merely by describing that equipment in a new lease schedule executed by the parties. The original lease contract terms and conditions apply to all subsequent schedules.
 

Middle Market
A market segment generally represented by financing under 2 million and dominated by single investor leases.
 

Municipal Lease
A lease designed to meet the special needs of state and/or local governments. These leases contain a "non-appropriation" clause stating that the only condition under which the lessee may be released from its payment obligation is when the legislature or funding authority fails to appropriate funds. Since the lessee is a municipality or an organization supporting the government, it is exempt from paying federal income taxes. For this reason, the Internal Revenue Service does not charge the leasing company income taxes on leases to these customers.
 

Net Cash From Financing
Cash flows generated through debt and equity financing.
 

Net Cash From Investing
Cash flows associated with the buying and selling of fixed assets and business interests.
 

Net Cash From Operations
The sum of net profit, depreciation, change in accruals, and change in accounts payable, minus change in accounts receivable, minus change in inventories.
 

Net Income
Gross sales (revenue) minus cost of goods sold, SG&A, taxes, interest, depreciation, and other expenses.
 

Net Lease
A lease wherein payments to the lessor do not include insurancemaintenance, which are paid separately by the lessee.
 

Net Present Value/Present Value
The discounted value of a payment or stream of payments to be received in the future, taking into consideration a specific interest or discount rate. Present Value represents a series of future cash flows expressed in today's dollars.
 

Net Worth
Total assets minus total liabilities of an individual or company. For a company, also called owner's equity or shareholders' equity or net assets.
 

No-Payment Lease
This lease structure offers a payment moratorium at lease inception. Ordinarily, the no-payment period is limited to two or three months, but, may sometimes extend as long as six months. Businesses benefit from No-Payment leases when new equipment requires a break-in, operator training, or set-up phase. This way, the Lessee is not required to remit lease payments during the equipment's initial start-up stage. No-Payment leases also help when existing equipment will be replaced shortly, but some leasing or financing payments remain. With a No-Payment period, Lessees can install new equipment earlier while avoiding making payments for both items. Often, installing new equipment while an older unit is still in place permits easier changeover and transfer to newer technology.
 

Non-Payout Lease
A lease in which the cash flows will not be sufficient to cover the full costs of the equipment, the costs of financing, the costs of administration and to provide a satisfactory return. The lessor looks to the residual to realize profit.
 

Non-recourse Loan
In a leveraged lease, the lenders cannot look to the leasing company that sold them the lease for repayment if the lessee fails to meet its payment obligations. The lender's only recourse is to the lessee and, therefore, the lessee's credit rating is of prime importance.
 

Off Balance Sheet Financing
Financing that does not add debt on a balance sheet and thus does not affect borrowing capacity as it would be determined by financial ratios, including leverage.
 

Open-End Lease
A conditional sale lease in which the lessee guarantees that the lessor will realize a minimum value from the sale of the asset at the end of the lease.
 

Operating Lease
If cash flow and lease payment amount are critical, a true or operating lease might be the best option. An operating lease is considered an "off-balance sheet" liability and contains a provision to purchase the equipment at the end of the lease for market value. An operating lease is also particularly advantageous to the customer if the lease is for computer systems or high-tech equipment, because of the usage flexibility it allows. Further, this same type of lease can work to the customer's benefit for accounting purposes, with payments deducted as an operating expense.
 

Owner's Equity
The residual interest in the assets of an entity that remains after deducting its liabilities.
 

Point
One percentage point (1.00%). Five points represents 5.00%. A point also represents 100 basis points.
 

Portfolio Acquisition
The process of purchasing a package of lease contracts and the associated discounted cash flow or remaining payments.
 

Present Value
The current equivalent of payments or a stream of payments to be received at various times in the future. The present value will vary with the discount interest factor applied to future payments.
 

Purchase Option
Most often, leases provide an option for the Lessee to purchase the equipment at the end of the lease term. Most Purchase Option are drafted on separate forms. Purchase Option forms may state a specific purchase price or the percentage of equipment cost to be paid, the terms and conditions for Purchase Option exercise, and any other provisions, such as the method employed for determination of Fair Market Value (if applicable), established by the Le