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Friday, January 04, 2008

A Full Payout Lease and how it differs from a FMV (Fair Market Value) Lease

A full payout lease (lease-to-own) is a type of lease which allows the lessee to possess and use equipment for a fixed period of time and for a set quantity of payments, typically at a fixed sum. The current value of the payment stream in this type of lease is equivalent to the acquirement cost of the equipment. The lease rate is calculated on the basis of the total purchase price of the equipment. On culmination of the term of a full payout lease, ownership of the equipment is transferred from the lessor to the lessee for a small payment. The lessee has several options at lease end including: returning the equipment, renewing the lease or buying the leased equipment.

The full payout lease is an excellent financing option if:
  • You wish to own the equipment in the future.
  • The useful life of the desired equipment is expected to be more than five years.
  • The dollar value of the asset is sizeable.
  • You would benefit from the flexibility in spreading out lease payments.

    There are several differences between a full payout lease and a Fair Market Value (FMV) Lease. First, while a FMV lease enables you to purchase the equipment at lease end for its Fair Market Value, the full payout lease includes no such option. Secondly, in a full payout lease, the payments are based on the total cost of the equipment without assuming any residual value, unlike the FMV lease. Thirdly, a full payout lease includes no possibility of getting the equipment off the balance sheet, which is not so in the case of a Fair Market Value Lease. Another important difference is that while a full payout lease enables a borrower to take depreciation on the leased equipment, a FMV lease only lets the borrower take smaller payments.

    If you are looking to lease equipment, contact Graphic Savings Group at 203.336.4034 or e-mail us at mail@graphicsavings.com.

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    posted by Graphic Savings Group at 8:50 PM

    Wednesday, January 02, 2008

    A Comparative Study of Operating and Capital Leases

    There are many benefits to leasing: no obsolescence, affordable monthly payments, tax benefits, ability to save capital for business expansions, maximizes buying power and flexibility. This blog will help you choose between two very common forms of leasing, an operating lease and a capital lease.

    If you wish to lease assets only for a minimal period of time, an operating lease is a favorable solution. In fact, this is a popular lease option in the airline industry. In an operating lease, the lessor gives the lessee the right to use his/her property, yet ownership rights remain with the lessor. All expenses associated with the lease are considered to be operating expenses and have no effect on the balance sheet. On culmination of the lease period, the lessee hands over the property to the lessor. Yet, as per the terms of an operating lease, the lessee should consent to utilize the article for only a fraction of its useful life. In contrast, for a capital lease, the period of the lease should be greater than 75% of the property's estimated monetary life.

    According to the Financial Accounting Standards Board, a particular lease should fulfill at least one of the four conditions mentioned below to be called a capital lease:

  • Ownership would be transferred from the lessee to the lessor at lease end
  • The lease term is more than 75% of the asset's estimated life
  • Current value of lease expenses after discount is greater than 90% of the asset's FMV (Fair Market Value)
  • Lease includes an option to buy the asset at a ''steal'' on termination of the lease

    A prominent difference between the operating lease and the capital lease is that the lessee does not acquire ownership rights in an operating lease but does in a capital lease. Also in a capital lease, the current value of leasing costs is considered as debts. Interest is imputed on this sum and appears in the income statement.

    For more information on a customized operating lease or capital lease, contact Graphic Savings Group at mail@graphicsavings.com.

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    posted by Graphic Savings Group at 7:06 PM

     
         


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