Equipment lease financing can be an effective way to get the equipment you need when you need it. By spreading payment over time instead of all at once, you may factor equipment use into an overall growth plan that allows for upgrading and expansion when you want it.
But all equipment finance leases eventually come to an end. What happens when your lease expires will depend on the terms, so it’s important to proactively consider your options and future plans when establishing those terms.
At Team Financial Group, we are happy to discuss how the terms of an equipment finance lease can better meet the needs of your organization. But let’s first review two types of leases that can help set a foundation for expectations.
The $1 Buyout Lease
Also known as a capital lease or an equipment finance agreement, the $1 buyout lease typically ends with the lessee owning the equipment through the course of the lease and after the lease expires.
The name of the lease comes from the typical $1 “final payment” after the remainder of the lease is paid off. The dollar is mostly a legal technicality for transferring permanent ownership.
A $1 buyout lease is often best suited for financing equipment you expect to keep and use for a long time. Since you are considered to own the equipment from the start of the lease, you may also be able to apply depreciation deductions and bonus depreciation from the first year.
So, if the equipment you wish to finance is expected to be a part of your business for a long time and maintain its value, a $1 buyout lease is worth considering. When the lease expires, there doesn’t tend to be anything else you need to do. You own the equipment.
The Full Market Value (FMV) Lease
An FMV lease does not automatically end with the lessee owning the equipment the way a $1 buyout lease ends. It operates more like a rental agreement.
You usually have a few different options at the end of an FMV lease:
- Purchase the equipment outright at its current fair market value
- Continue to rent out the equipment at the same or a newly agreed upon rate
- Return the equipment
An FMV lease can be preferrable to a $1 buyout lease when you don’t have plans to keep the specific equipment past a certain time. It can also be preferrable if the type of equipment you are leasing must be regularly updated or requires purchasing new models frequently. When your FMV lease runs out, you can return the equipment and begin a new lease on the latest model of the same equipment.
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What should you consider when your equipment finance lease ends?
Whether you want to return equipment, purchase it, or renew your lease can depend on multiple factors. The terms of your lease will have a significant influence on your options, but many other factors may be at play as well.
Here are some questions you might want to ask before making a final decision:
- How do the total costs of purchasing equipment compare to leasing it? You should consider both upfront costs as well as long-term maintenance.
- What is the remaining life of the equipment?
- How closely does the equipment align to your future business plans?
- Will the equipment in its current form remain useful to your business, or would a newer or different model substantially improve your operations? Would upgrading provide more cost savings in the long run?
- If there is a chance the equipment will no longer be useful to your business in the future, do you have a plan for what to do with it?
- What tax benefits may be available with each option?
If you don’t know the answers to any of these questions, Team Financial’s experts can work with you to help you find them.
It’s best to plan for future equipment lease finance options now
Before you enter into a $1 buyout or FMV lease, it’s important to consider your long-term goals with the equipment you are leasing. That includes the potential for a series of different leases over time.
As your business intentions expand, so might your equipment needs. Would continuing updated leases with certain equipment be enough to sustain your ambitions, or would you need additional equipment over time? Should you lease-to-own certain foundational equipment while renting others?
It can take significant planning and analysis to create an ideal financing plan. At Team Financial Group, we like to build long-term relationships with our clients and help them determine the best strategies and leasing options to help them move forward with their goals.
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Build your equipment finance leasing plans with Team Financial Group
Are you looking to expand your capabilities with new equipment and want to explore your financing options? We’re here to help.
You don’t need to have all the specifics yet. Simply fill out your basic details on our application page and we’ll get in touch to discuss your plans and next steps. Let us help you find the best way to move your business forward.
The content provided here is for informational purposes only. For financial advice, please contact our commercial financing experts.