FMV Lease vs. $1 Buyout Lease: Optimize Equipment Financing for Your Business

If you're planning to bolster your business productivity by adding new equipment, equipment financing provides an economical alternative to direct purchase. Leasing allows you to modernize, upgrade, or acquire essential equipment without draining your operational cash flow.

Two prevalent types of equipment leases exist in the small business loans landscape:

• Fair Market Value (FMV) lease
• Dollar ($1) Buyout Lease or Equipment Financing Agreement (EFA)

Let's unravel the specifics of each, helping you to secure the optimal financing for your business equipment needs.

Fair Market Value (FMV) Lease

Acting akin to a rental agreement, the FMV lease or operating lease does not confer ownership of the leased equipment. It's comparable to auto leasing, where the lessee uses the equipment for a fixed duration with a set monthly payment. Upon lease termination, the lessee can buy the equipment at its then-current FMV, extend the lease, return the equipment, or upgrade.

• FMV leases are often the least costly, making them appealing for small businesses.
• Suitable for technologies prone to rapid obsolescence, like IT equipment (servers, computers, software), security systems, GPS, telephony, and energy solutions (solar panels, HVAC systems).
• FMV leases are favored when the business does not intend to keep the equipment post-lease.
• These leases mitigate the costs and inefficiencies associated with consistent upgrades and aging tech equipment.
• Lease durations typically span 12 to 60 months, with a stable monthly payment.
• Leased equipment does not appear on the company’s balance sheet, and monthly lease payments are tax-deductible.
• To secure an FMV lease, the applicant needs a strong credit score.

Dollar ($1) Buyout Lease (Equipment Financing Agreement)

A $1 Buyout Lease, otherwise known as a capital lease or EFA, is akin to equipment purchase with a loan. It is chosen when the business intends to retain the equipment long-term, or where equipment obsolescence is irrelevant.

• This lease type demands higher monthly payments compared to FMV leases.
• $1 Buyout Leases are chosen for durable equipment like construction and cleaning equipment, material handling tools, and automotive repair machines.
• Lease terms and monthly payments are fixed.
• Ownership usually shifts to the lessee, with the equipment recorded as a company asset on the balance sheet.
• Tax benefits abound when using a $1 Buyout Lease. The entire equipment cost can often be written off as a business expense in the first year under Section 179. Bonus depreciation, per the Tax Cuts and Jobs Act, can also be claimed for any qualifying asset.
• The lessee acquires the equipment for $1 upon lease termination.

Comparing FMV and $1 Buyout Leases

Choosing the right equipment financing for your business depends on your unique needs and circumstances:

FMV lease:

• Pros: Affordable, simplifies tech upgrades, scalable, reduced cost of equipment use, some tax benefits, possible 100% financing with no down payment.
• Cons: Stricter financing qualifications, not suitable for financing used or highly specialized items, no equipment ownership.

$1 Buyout Lease/EFA:

• Pros: Equipment ownership, robust tax benefits (including 100% bonus depreciation), potential 100% financing with no down payment.
• Cons: Higher costs due to equipment purchase and maintenance responsibility, not typically available for startups (< 2 years old).

Another variant to these major equipment financing options is the Term Residual Lease. This lease offers the standard option to either purchase or return the equipment at the end of the original term but with a shortened payment period. At the end of this shortened term, the customer can buy the equipment by making additional payments.

The best equipment financing solution often boils down to your business cash flow, tax situation, and the type of equipment you wish to finance. An FMV lease is ideal for businesses requiring frequent tech updates, while a $1 Buyout Lease could be the go-to choice for long-term asset use or potential resale.

Bibliographies:

1. https://teamfinancialgroup.com/blog/1-buyout-lease-vs-fmv-lease-whats-the-difference/ accessed on 04/20/2021.
2. https://www.crestmark.com/fair-market-value-lease-vs-1-buyout-lease-need-know/ accessed on 04/20/2021.
3. Pawnee Leasing Corporation JANUARY 2021 BROKER RATE SCHEDULES & GUIDELINES