Basics
Why Finance/Lease?
Most businesses require equipment in order to operate and, in many cases, to make money. Each business has to make the best procurement choice based on numerous factors such as cash flow, balance sheet impact and available credit lines. A business can use equipment finance to acquire equipment, raise capital from owned equipment, and manage its capital structure. Equipment finance offers flexible choices that can work with diverse objectives of most businesses.
Equipment can be financed for virtually every sector of industry. In fact, businesses that finance equipment range from Fortune 100 corporations to one-person operations in a variety of endeavors. Diverse as these companies are, each has this in common: efficient allocation of capital for the employment of plant and equipment. Owning equipment is incidental.
Providers of equipment finance also offer a broad range of capital solutions, from master leases to non-recourse loans that may finance land, buildings and equipment. To make the best choices of how to finance these capital assets, a business must determine which options best suit its need for capital and capital goods, as well as the optimal financial structure for its business.
This guide will offer you concepts, terminology and useful information to demonstrate the value of equipment finance and why and how you should consider use it as a tool in your business. It is not intended to constitute legal, accounting, tax or other advice. You should consult your advisors for appropriate direction.
Executive Summary
Equipment finance is a key component of capital formation. Domestically, equipment finance accounts for about $600 billion of business each year. It is, and will continue to be, a dynamic and growing business. A single transaction may involve buying, selling (including conditional sales) and financing plant and equipment, including related software and services. The breadth of financing enables companies to invest in capital goods to operate, maintain and expand their businesses.
The assets that a business may need finance are varied; examples include:
- IT, including software
- medical equipment
- manufacturing and mining equipment
- aircraft
- energy facilities
- trucks, transport, vessels and automobiles, and
- construction equipment
About 80 percent of large and small businesses in the United States use equipment finance to fund their operations. The key aspect to understand about equipment finance is that it is one of the most important ways for businesses to invest in capital while managing their balance sheets and cash flow.
Equipment finance generally refers to leasing and secured lending of capital assets such as machinery and other equipment. Whereas leasing dominated the equipment finance market, in recent years, loans, conditional sales and financing leases have taken on substantial importance and now constitute approximately 60 percent of equipment finance transactions. The other 40 percent consists of true leases in which the lessor usually retains a 15 percent or more of the residual value of the equipment.
A lease typically refers to an arrangement where one party who owns or controls equipment, called the lessor, transfers possession and use of that equipment for a period of time to another party, called the lessee, in exchange for the payment by the lessee to lessor of periodic rent (i.e., monthly, quarterly or semi-annually). A loan refers to an arrangement where the lender finances the acquisition of an asset by the borrower with the commitment of repayment of principal and interest, usually with a secured interest in the asset financed.
Market Segments
Equipment finance is available to for a wide range of deals from hundreds of dollars (single investor leases) to hundreds of millions of dollars (leveraged leases and single investor leases). Three general segments exist and financiers widely accept them, as follows:- Small-ticket financing where the cost a lessor or lender pays for equipment or provides financing in amount that usually does not exceed $250,000. Equipment in this segment includes such items as computers, peripherals, office equipment, services, software and telephone equipment.
- Middle ticket financing where the cost a financier pays for equipment or provides financing usually ranges between $250,000 and $5,000,000. Equipment in this segment includes (as a tiny sample) computers, software, services, enterprise networks, aircraft and manufacturing equipment, health services, construction equipment and medical equipment.
- Big ticket or large-ticket where the cost a financier pays for equipment or provides financing in an amount that usually exceeds $5,000,000. Equipment financed in this segment includes power plants, railroad equipment, helicopters, commercial and corporate jets, vessels and other transportation equipment, and large mining, oil and gas exploration and energy generation equipment.
Deal size and finance-able equipment type create myriad combinations for equipment financing in each segment.