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Over the past 20 years, leasing has become the fastest growing method of accessing capital equipment for American businesses. Because of its flexibility, leasing can benefit all types of companies; large and small, public and closely held, high-tech and industrial. Purchasing equipment - from aircraft to railcars and oil rigs to satellites - can be prohibitively expensive, ranging in value from tens - to hundreds-of-millions of dollars. Leasing such equipment via an Equipment Trust allows your company the use of such high-ticket equipment without the astronomical cost of purchasing the equipment outright.
What is an Equipment Lease?
In its simplest form, an equipment lease is a written agreement through which the owner (the lessor) of a piece of equipment gives the user (the lessee) the right to use the equipment for a specified period of time for an agreed upon payment. However, in this case, the equipment is, perhaps, a $10 million aircraft rather than an $18,000 automobile. Thus, the equipment lease is somewhat more complex than the traditional automobile lease.
An equipment lease is usually called a "leveraged lease" because the investor or trust owner typically provides only a 20% investment of the equipment cost into the trust. The trust is managed and administered by an owner trustee. The owner trustee is typically a bank or trust company with expertise in this specialized financing area. A lender provides the 80% balance of the total equipment cost. These proceeds are received from the lender in exchange for equipment trust certificates which have a security interest in collateral, including future rent payments and the equipment asset itself. With the equipment cost in hand, the trust - through the owner trustee - then purchases the equipment from the manufacturer and, in turn, then leases the equipment to your company. As part of your lease, you are obligated to make rental payments that are sufficient to pay all of the principal and interest payments due to the lenders.
There are several advantages to utilizing such a lease arrangement to purchase major equipment for your business. Leasing allows you to gain access to the equipment you need without imposing upon your company's cash flow. You preserve capital, as the outright purchase of such high-ticket equipment would require a huge investment. Since leasing usually requires a smaller expenditure than a down payment on a loan, funds are available for other uses, such as daily operations, expansion, or acquisitions. Leasing can also reduce your company's tax burden, since lease payments may be fully-deductible as an operational expense, unlike loan payments.
If your business demands the use of high-priced assets, such as aircraft, railcars, ships, or even satellites, leasing such equipment via a leveraged equipment lease may be worth investigating.
Updated: January 1, 2013
This article is for informational purposes only and is not intended as an offer or solicitation for the sale of any financial product or service or as a determination that any investment strategy is suitable for a specific investor. Investors should seek financial advice regarding the suitability of any investment strategy based on their objectives, financial situations, and particular needs. This article is not designed or intended to provide financial, tax, legal, accounting, or other professional advice since such advice always requires consideration of individual circumstances. If professional advice is needed, the services of a professional advisor should be sought.
© 2013 Wilmington Trust Corporation.