Capital Lease

Ownership of the asset is the cornerstone of a Capital Lease and Loan structure.

The Lessee / Buyer is the recognized owner of the asset, listed on the balance sheet. Capital leases, finance leases, and loans are full-payout, non-cancelable agreements, in which the Lessee is responsible for maintenance, taxes, and insurance, also known as a Triple Net Lease. The Lessee receives the depreciation benefits.

Capital Leases and Loans are most attractive in cases where the lessee wants the tax benefits of ownership or expects the equipment's residual value to be high. The Equipment is simply pledged as collateral, whereby the Lessor files a UCC/security interest. The term of a finance lease tends to be two (2) to seven (7) years.

This type of lease is classified and accounted for by a lessee as a purchase and by the lessor as a sale or financing if it meets any one of the following criteria:

• the lessor transfers ownership to the lessee at the end of the lease term;
• the lease contains an option to purchase the asset at a bargain price;
• the lease term is equal to 75 percent or more of the estimated economic life of the property (exceptions for used property leased toward the end of its useful life); or
• the present value of minimum lease rental payments is equal to 90 percent or more of the fair market value of the leased asset less related investment tax credits retained by the lessor.

Capital leases are also classified as Non-tax Leases by the IRS.

Traditional Loan

A Traditional Loan is a full-payout, non-cancelable agreement documented with a note and security agreement and is used to finance the purchase of business equipment. In most cases, the equipment itself is all the collateral needed. With loan financing, you own the equipment and receive the tax benefits of depreciation and interest deduction.

One benefit of a Loan is the borrower's ability to choose the option to either fix the interest rate for the term of the loan or a floating rental rate with an index such as commercial paper. Further, the Borrower enjoys the benefits of ownership and the future flexibility to utilize accrued equity to leverage working capital when needed. Loan typically requires a down payment; the monthly payments are fixed payments.