Capital Leases & Loans

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.

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The Financing Process

To begin the financing process complete our simple online credit application inquiry. After receipt of your initial submission, EFG will gather additional information specific to your purchase and company and electronically forward a fully populated Credit Application for your review and signature.

We will promptly contact you to develop a finance proposal. Typically, we are able to process a request under $500,000 with little to no additional information.

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Operating Leases

An operating lease is particularly attractive to companies that continually update or replace equipment and want to use equipment without ownership, but also want to return equipment at lease-end and avoid technological obsolescence. An operating lease usually results in the lowest payment of any financing alternative and is an excellent strategy for bypassing capital budgeting restraints. It typically qualifies for off-balance sheet treatment and can result in improved Return On Asset (ROA) due to a lower asset base. It can also result in higher reported earnings in the early years of the lease.

The Lessor recognizes the tax incentives provided by the tax laws for investment and ownership of equipment. It allows the lessor to claim ownership and the lessee to claim rental payments as tax deductions. Generally, the lease rate factor on tax leases is reduced to reflect the lessor's recognition of this tax incentive. This type of transaction qualifies as a lease under the Internal Revenue Code.

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