Key Differences Between Most Popular Leases

By Theresa Smith

farm toolOver the next 12 months the percentage of U.S. small businesses that plan on increasing their capital spending is 28% according to the Wells Fargo/Gallup Small Business Index. That’s the highest rate reported in four years.

If you are looking into increasing your capital spending and considering leasing, the first thing to understand is the three most common types of leases: Fair Market Value Lease; $1 Purchase Option Lease; and 10% Purchase Option Lease.

A Fair Market Value (FMV) Lease is one of the most common leases that businesses select in part because of its flexibility. Businesses often select a Fair Market Value lease if the equipment they are acquiring, such as technology equipment, rapidly loses its value once it is placed into operation.

Fair Market Value (FMV) Lease:

  1. Offers the lowest monthly payments. An FMV lease is ideal for businesses that want the lowest possible payments and are unsure if they want to acquire the equipment at the end of the lease.
  2. Provides tax incentives.  Businesses may be able to deduct the monthly lease payments as an operating expense deduction.
  3. Provides the greatest flexibility at lease end. At the end of a FMV lease a business can decide to return the equipment, continue to pay for and use the equipment per your agreement with the lease finance company, purchase the equipment or upgrade it with newer equipment.

A $1 Purchase Option Lease is another of the most common leases that businesses use to acquire equipment today. Each type of lease is useful, depending on the type of equipment and the type of anticipated use. A $1 Purchase Option Lease is often used by businesses or schools when they know they will still be using the equipment for an extended period after the end of the lease term.

$1 Purchase Option Lease:

  1. Provides businesses the ability to purchase the equipment for a $1 at the end of the lease term.
  2. Monthly payments are higher than a Fair Market Value lease because the lessee is now financing 100% of the equipment cost.
  3. Provides additional financial benefits that may include depreciation and interest expense benefits for tax purposes.

The 10% Purchase Option Lease is often selected by businesses who want to keep their options open to purchase the leased equipment at the end of the lease. This lease is most appropriate for businesses that aren’t ready to make a purchase decision at the beginning of their lease.

10% Purchase Option Lease:

1. The lessee usually may purchase the equipment at the end of the lease at a fixed price equal to 10% of the original price.

2.  The monthly lease payment will be lower than the $1 Purchase Option Lease but may be higher than the Fair Market Value Lease.

3.  Provides additional financial benefits that may include depreciation and interest expense benefits for tax purposes.

Not sure which type is best for your business? Please contact us and we will walk through the options with you.

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