Pasco Printers

Financing Options

If your business needs new equipment, you probably want to know about your financing options. Here we’ll break down the similarities, differences, and pros and cons of two of the most popular equipment lease options: $1 buyout leases and fair market value (FMV) leases.

What Is a $1 Buyout Lease?

A $1 buyout lease is a type of capital lease, which means you own the equipment or property throughout the life of the lease (and afterward too). The leased equipment will show up on your balance sheet as an asset. A $1 buyout lease can also go by other names; you might hear it called a Capital lease or an Equipment Finance Agreement (EFA). Compared to a typical operating lease, where you strictly lease the equipment and the leasing company or financing partner (the lessor) still owns the asset, a $1 buyout lease “feels” more like a loan. The lease gets its name because, at the end of the lease period, you’ll complete the payments on the asset for a nominal price, often $1. But when it comes time to make monthly payments (or however often your lease term specifies), the $1 buyout lease resembles a lease more than a loan. Your $1 buyout lease won’t have stated interest rates like a loan would. Instead, you’ll make fixed payments, and the finance charges get rolled into your payments. So, you can think of a $1 buyout lease (a.k.a. equipment finance agreement) as a sort of hybrid between a loan and a lease. You may be able to get 100% financing with no down payment and fixed payments like you would with a lease. However, you own the equipment from the time of purchase, and the equipment appears on your balance sheet, similar to a loan. Business owners who are purchasing equipment tend to like $1 buyout leases because they’re straightforward, streamlined, and easy to understand. Also, when you finance the equipment purchase with a $1 buyout lease, you may be able to write off the entire cost of the equipment in the first year as “bonus” depreciation under the Tax Cuts and Jobs Act. Why Would I Want a $1 Buyout Lease? Since you own the equipment, a $1 buyout lease often makes sense when you’re looking to purchase a piece of equipment that will stay in use for many years and retain most of its value.

What Is an FMV Lease?

A fair market value lease (FMV lease) can be a type of operating lease, which means it functions more like a rental agreement compared to a $1 buyout lease. With an operating lease, you don’t own the equipment you’re leasing. However, the payment structure is similar to a capital lease (like the $1 buyout lease): you may be able to get 100 percent financing with no down payment, and you’ll make fixed payments until the end of the lease term. At the end of the term, you’ll usually have the option to purchase the equipment at the current fair market value (FMV), which is where the FMV lease gets its name. You can also choose to continue making your lease payments and using the equipment. If you don’t want to exercise your purchase option or continue leasing the equipment, you can return it and walk away. FMV leases tend to last between one and five years. Why Would I Want an FMV Lease? So, why would you want to lease without the benefits of ownership? For some types of new equipment that go out of date quickly and lose most of their value, ownership doesn’t have many benefits. Think about a computer as a classic example: when you buy a new computer, it will lose most of its value in the first few years, so you can’t resell it for anything close to what you paid for it. In five to ten years, technology will move on to the point that the computer will have almost no resale value, no matter how cutting-edge it was when you bought it.

Conclusion

Which solution works best often comes down to the type of equipment you want to finance. An FMV equipment lease usually makes sense if your business needs to stay current, and you update equipment frequently. If you plan to use the asset for a long time or think you can sell it for a good value when you’re finished using it, then a $1 buyout lease may be the best solution.