Equipment Leasing Glossary
Last updated on January 12, 2023 by
Leasing can often seem like a different language. When working with a leasing company, equipment distributor, or manufacturer, you may encounter terminology (terms, concepts, acronyms, and phrases that you haven’t heard of before, but that apply to your ability to lease, your agreement, and your terms negotiations.
We’ve created a comprehensive leasing glossary of terms and definitions below to help you better understand leasing terminology used in conversation, application processes, and equipment lease agreements.
Additionally, we review the three most common types of equipment leases and the four most common types of companies you can lease through.
Equipment Leasing Glossary of Terms
In business, an asset can be defined as “anything of value, or a resource of value that can be converted into cash.” Examples of equipment that can be used to generate revenue include office equipment, industry-specific machinery (e.g., lab equipment), heavy equipment, various vehicles and aircrafts, and real estate and property.
A payment larger than the usual loan repayment amount that is due at the end of the loan term. The payment is meant to repay the remaining principal balance, and is a characteristic of a balloon loan.
Bargain Purchase Option
A type of purchase option the lessee can exercise in order to purchase the equipment on lease at a lower price than the fair market value. Bargain purchase options are typically included to incentivize the lessee to purchase the equipment on the option date.
Bargain Renewal Option
A type of provision that allows the lessee to exercise the option to renew an equipment lease for a rental rate that is predetermined prior to the commencement date. The renewal option is, in general, substantially lower than the expected fair market value at the date the option can be exercised.
This is equal to the cost of carrying a piece of equipment (or any asset) on a company’s balance sheet according to the equipment’s accumulated depreciation. In other words, an asset’s book value is the original cost minus accumulated depreciation.
Capital leases, known as finance leases under ASC 842, are defined as contracts between a lessor and lessee that grant the lessee the rights to use an asset, and include treating the leased asset as if it were purchased by the lessee for accounting purposes. The actual transfer of ownership rights of the asset occurs at the end of the lease term.
Certificate of Delivery & Acceptance
A document that the lessee signs acknowledging that the equipment being leased has been delivered and accepted by the lessee.
Certificate of Insurance
A statement provided by an insurance company or its agent that shows a certain policy has been written. It typically summarizes the coverage of the policy, and is required by the lessor in order to complete a lease transaction.
A piece of equipment (or any asset, really) that a lender accepts as security for a lease or loan. The role of collateral in a financing agreement is to protect the lender in case the borrower defaults on their loan or rental payments. The lender can typically seize the collateral and sell it to recoup losses, per the agreement’s stipulations.
Certain liabilities that are hard to quantify because they may or may not come to pass. However, if the liability does pass, it will typically result in a loss. A pending lawsuit is an example of a contingent liability. Leasing companies and lenders want to know whether a company has many contingent liabilities or not, which can affect their ability to honor all lease or loan payments.
Cost of Capital
The minimum return a company needs to generate in order to justify the cost of a specific investment. In other words, will a project that involves a new piece of equipment cover the costs of buying or leasing that instrument? The overall cost of capital includes all capital sources (equity and debt), which is weighted according to the company’s preferred or existing capital structure.
Cost of Goods Sold
The total cost of purchasing materials and manufacturing a product or products. The cost of goods sold, or COGS, is a way to measure the direct cost of producing something, and includes all the expenses directly related to the production of goods or services.
The total amount of business assets that are expected to be used or sold within the fiscal year or operating cycle. This includes inventory, cash and cash equivalents, accounts receivable, marketable securities, prepaid expenses, and other various types of assets that can be converted into cash within the fiscal year. Current assets are accounted for on the balance sheet. The inclusion of long-term fixed assets, intangible assets, and other non-current assets represents a company’s total assets.
The sum of all obligations expected to be paid within the fiscal year. This includes all salaries, interest, accounts payable, and other debts. Current liabilities and assets are used in the current ratio, a type of financial ratio, to determine a company’s ability to meet its current liabilities using its current assets. Current liabilities are also accounted for on the balance sheet. The inclusion of long-term liabilities—obligations that are due after a year or more—represents a company’s total liabilities.
A measurement of how much a piece of equipment’s value drops each year based on factors like wear and tear and obsolescence. Equipment depreciation is based on a couple of things: the initial value of the equipment, its useful life, or the number of years it takes to fully depreciate, and its salvage value (the book value of an instrument after depreciation is complete).
A certain interest rate that is used in discounted cash flow (DCF) analysis to bring future cash flows to their present value. This allows a company to present them based on the value of today’s dollar. Use of a discount rate removes the time value of money from future cash flows, and is an important part of lease accounting compliance. It measures the lessee’s lease liabilities under the accounting standard ASC 842.
The termination of a lease before the lease term has been completed. The lessor may or may not approve of early termination. Sometimes penalties or fees are required, such as a final payoff that includes the sum of the remaining payments (discounted at a nominal rate). If an early termination clause is included in the lease agreement, it provides the lessee with the ability to terminate the lease before the full term length is completed.
Economic Life of Leased Equipment
The amount of time a piece of equipment is expected to be economically usable at the commencement of the lease (the lease’s start date). This amount of time takes into account normal repairs and maintenance
Options that are included in the lease agreement that provide the lessee the flexibility to choose what it will do with the equipment at the end of the lease term. Some common end-of-lease (or end-of-term) options, like the ones offered by Excedr, included purchasing the equipment at the fair market value, renewing the lease, or returning the equipment.
Estimated Useful Life
The estimated useful life of a lease is similar to the economic life of leased equipment in that it represents the period in which the equipment (or asset) is expected to be useful. Estimated useful life can be used to calculate the maximum allowable term of a tax lease, determine whether or not the lease is a capital lease or finance lease, and establish the calculation method for depreciation.
Equity, or shareholder’s equity, represents a couple of things. It represents ownership in a company and its assets, which do or do not have debts or other liabilities attached, the shares of stock issued by a company, and the book value of a company.
Refers to the exchange of ownership in a company for financing, whether it be an investment or a loan. Equity participation may involve an investor or lender purchasing shares of the company through various types of equity: common stock, preferred stock, options, and more. The greater the equity participation by an investor or lender, the higher the percentage of shares owned.
Fair Market Value (FMV)
The objective value of a piece of equipment or other asset that is determined by the marketplace or informed buyers and sellers who are both willing to make the exchange and are not under pressure to do so.
Fair Market Value Lease
A type of lease that includes an option for the lessee to either renew the lease at a fair market value renewal or purchase the equipment at the fair market value price. An FMV lease is considered a true lease, or tax lease, which is generally synonymous with the term operating lease.
A type of lease that provides the lessee with the right to use a leased asset for a certain period and then own that piece of equipment after the lease term ends. Finance leases were previously referred to as capital leases, and may also be called sales leases. They are used to finance the equipment, and are not considered to be true leases because of that characteristic. Additionally, during the lease term, the lessee shares in some of the risks and returns associated with the equipment, and accounts for the asset as if it were purchased.
Financial Accounting Standards Board (FASB) 13
A statement issued by the FASB that establishes financial accounting standards for both lessors and lessees. One aspect of this standard includes how leases are classified, and is included in the accounting standard ASC 842. It states that a lease will be considered a finance lease if it transfers substantially all of the benefits and risks of ownership and accounts for the leased asset as if it was an acquisition. If the lease does not meet these conditions, and ownership is not transferred, then it will be considered an operating lease, or true lease.
Fixed Purchase Option
An option the lessee can exercise to purchase the leased equipment from the lessor on a predetermined option date and price.
Not to be confused with net profit, gross profit is the total sales of a company after the costs related to the manufacturing and selling of its products or services are subtracted. It measures how efficiently a business uses its labor and supplies for manufacturing goods or offering services to customers, and is an important figure when determining financial performance and profitability of a company.
Incremental Borrowing Rate
The rate of interest a lessee would have to pay to borrow the funds needed to purchase a piece of equipment instead of lease. The rate is calculated based on a similar term, and the amount borrowed has to equal the lease payments in a similar economic environment.
A type of financing in which a company’s intellectual property is pledged as collateral to help obtain a loan. Through this, a lender is given security interest on the IP. They may put a lien on the IP (asset-specific) or put the lien on the company (blanket), which includes the IP. IP-insured financing is typically conducted when a company’s assets are largely intangible. This type of financing can be a risky option when the IP is a company’s most important asset. In fact, a technical default in the financing arrangement could liquidate all of the company’s assets.
A document that establishes that the landlord or mortgagee of a building has acknowledged a leased asset on the premises is owned by a third party—in this case, the leasing company—and is being leased to the lessee. The waiver shows that the landlord agrees to not interfere with the leasing company’s rights to the leased property.
Also referred to as a lease agreement, a lease is a contract between two parties, known as the lessor (owner of asset) and lessee (user of asset), that establishes the lessee’s right to use the lessor’s asset for a specific period. In order to use the asset, or piece of equipment in this case, the lessee must pay the lessor fixed rental payments over the length of the lease term.
A document attached to a master lease agreement that shows when lease payments are due and in what amounts. It may include other information as well, such as a detailed description of the leased asset or other terms included in the lease agreement.
Defines the period over which a lease agreement takes place. For example, a lease term lasts anywhere from several months to several years, and that period is defined in the lease agreement. Lease terms can be fixed, periodic, or indefinite, but, in the case of an equipment lease, the term is usually fixed.
A person or company that holds the lease of an asset. In this case, a piece of equipment or machinery. The lessee takes possession of the leased equipment and must uphold specific requirements and obligations of the lease agreement, such as monthly, quarterly, or annual lease payments.
A person or company that leases an asset to another party. A lessor is the owner of the asset and collects payments for the use of the property.
If you fail to repay a loan, a lien is a legal filing that gives the lender the right to your property or assets. Liens can be placed on a number of things, from property to equipment to vehicles and even personal property.
Any debt with maturities longer than 12 months. In other words, any long-term liability that a company owes a lender or lessor that is due after a year or more. Like current assets and liabilities, long-term debt shows up on the balance sheet under the liabilities section.
A single lease agreement that covers the general terms and conditions of a lease and any additional lease transactions established between the lessee and lessor that involve similar types of assets. Additional equipment can be added from time to time by describing the equipment in a new lease schedule executed by both parties, with the original lease contract terms and conditions applying.
Net Cash From Operations
The amount of cash you generate solely from regular business operations. This includes the manufacturing and selling of products or services, and is typically the first section included in a company’s cash flow statement. It’s typical that many early-stage companies, especially biotechs, are in a “cash burning” stage, and are not generating any cash flow from operating activities (i.e., negative operating cash flow).
A company’s revenue minus the cost of goods sold (COGS), operating expenses, taxes, interest, depreciation, and other expenses the business accrues.
Net Present Value
Net present value (NPV) is a method used to determine the present value of all future cash flows a company generates. Specifically, the value right now of some money in the future based on a specific discount rate. When accounting for an operating lease, the future lease payments must be present valued using the NPV formula. NPV is different from present value in that it takes into account the initial capital outlay required for an investment or project.
A type of accounting strategy that a company can use to move certain assets, liabilities, or transactions off of the balance sheet. The business might use off-balance-sheet financing to appear more attractive to investors or need to borrow more capital from a lender to fund operations but currently have a lot of debt. Operating leases, at one point, were an example of off-balance-sheet financing.
An operating lease is a contract, or lease agreement, where the owner of an asset (the lessor) grants the holder of the lease (the lessee) the rights to use that asset for a specific period of time. This type of lease does not involve the transfer of ownership, but it can include a purchase option at the end of the lease term.
A guaranty is a legal promise made by a third party, known as the guarantor, to cover a borrower’s debt or other liabilities if the borrower defaults. If a loan is guaranteed by a third party, it is referred to as a guaranteed loan. When the third party involved is the parent company of the borrower (the subsidiary company), the guaranty is known as a parent guaranty.
Like a parent guaranty, a personal guaranty is also a legal promise made by a third party to cover a borrower’s debts if the borrower defaults. In this case, however, the third party is an individual, typically a founder or executive, and the borrower is the business they own or run. If the business cannot make the payments owed, it is the responsibility of the individual to repay the debt.
A lease agreement option the lessee can exercise in order to purchase the leased equipment at the end of the lease term, for either a fixed amount or the fair market value of the leased equipment at the time the purchase option is exercised. It is different from a bargain purchase option, which allows the lessee to purchase the equipment at a price below the FMV.
A purchase order, or PO, is a document that serves as the first official offer issued by a buyer to a seller. A PO tracks important purchase information, such as equipment types, quantities, and the agreed upon prices for products or services from the seller, confirming the buyer’s intent to purchase.
The money generated from regular business operations, calculated as the average sales price times the number of units sold, whether that unit represents products or services. In other words, the total value of income generated by the sale of goods or services.
A sale-leaseback (SLB), also known as a sale-leaseback transaction, sale-and-leaseback, or leaseback, is an agreement in which a company sells recently purchased lab equipment to a third party (the leasing company, in this case) in order to get back what was paid for the instrument. After selling the instrument, the company then leases equipment back from the leasing company, paying for it over multiple years rather than paying for it all up front.
A sum of money deposited by the lessee to the lessor as a type of prepayment in the leasing process, which is eligible to be returned at the end of the lease term provided all contract stipulations are met.
Unlike long-term debt, short-term debt represents any liabilities or other debt obligations that must be paid within the fiscal year. It is another term for current liabilities.
A type of equipment lease that includes a payment stream requiring the lessee to make payments only during certain predefined periods of the year. When entering into a skip-payment lease agreement, the lessee can choose the months in which no lease payments are required.
In general, an underwriter is a financial expert who evaluates the level of risk involved in a business transaction or decision. For example, an underwriter will evaluate the financial health of a company applying for a lease, and determine the risk involved in leasing to the business. Underwriters help businesses decide whether a risk is worth taking.
Underwriting is the process by which an underwriter determines the financial health of a company and the risks involved in lending to the business or financing one of its equipment acquisitions.
A vendor is the manufacturer or distributor that supplies equipment to a purchaser or lessee. For example, when working with Excedr, companies get an instrument quote from the vendor and submit a PO when intent on acquiring the equipment. From there, Excedr finances the equipment and leases it to the lessee.
Types of Equipment Leases
Three common lease types include operating leases, capital leases, and sale-leasebacks:
An operating lease is a type of lease agreement where the owner of an asset (the lessor) grants the holder of the lease (the lessee) the rights to use the asset for a specific period of time. It can also be referred to as a fair market value (FMV) lease.
Operating leases do not involve the transfer of ownership, but they do often include a purchase option at the end of the lease term. For accounting purposes, operating leases are treated like rentals, in that the leased asset and monthly lease payments are recorded as operating expenses.
Capital Lease (or Finance Lease)
A capital lease, or finance lease, on the other hand, does include the transfer of ownership rights to the lessee, albeit, this transfer doesn’t actually happen until the end of the lease term.
However, during the lease, the ownership transfer characteristics do apply, meaning the leased asset is treated as being owned by the lessee for accounting purposes. This accounting treatment means a finance lease is considered more of a loan.
A sale-leaseback (SLB), also known as a sale-leaseback transaction, sale-and-leaseback, or simply leaseback, involves selling lab equipment you recently purchased to a leasing company or lender and getting back what you paid for the instrument in full while retaining the ability to use the piece of equipment by leasing it.
Rather than tie up your money in a fixed asset, you can recoup what you spent and pay to use the equipment over multiple years through flexible lease payments (depending on who you work with).
Because you can get cash and the equipment needed to progress R&D and commercialization, sale-leasebacks can be highly useful to laboratories that rely on high-cost, cutting-edge instrumentation in an equally cutting-edge, competitive, and risky industry.
How To Secure an Equipment Lease
There are a few different types of companies you can secure an equipment lease from, including leasing companies, equipment dealers, manufacturers, lease brokers, and banks.
Leasing companies provide various leasing services, terms, and products to businesses. There are two different types: independent and captive.
Independent leasing companies and lease specialists range in scope and size, but all work independently from other companies, dealers, or firms. Excedr is an example of an independent leasing company, one that specializes in biotech and life sciences equipment.
Subsidiary leasing arms of a manufacturer or equipment dealer are referred to as captive leasing companies, and provide leasing services for the equipment specifically offered by the manufacturer or dealer network.
Equipment dealers frequently provide leasing services through a subsidiary leasing arm, helping to finance equipment in their inventory when the lessee cannot or does not want to purchase the equipment. They can also be referred to as resellers or suppliers, depending on their business activities.
A number of manufacturers offer leasing services to customers, making it possible for them to acquire larger amounts of equipment through financing. The subsidiary leasing arm of a manufacturer works to make it easier for customers to acquire the parent company’s equipment.
Lease brokers act as intermediaries between the lessee and the lessor, handling the transaction on both ends. As a middleman, the broker will submit your requests for leasing, and will present you with the lease agreement offers you receive. While brokers are a specialized segment of the leasing industry, they often come with a well-established network of vendors.
Banks already offer financing for equipment purchases, so it makes sense that some would also offer leasing as a service. The leases and terms a bank offers will vary depending on who you work with, but you will generally see a number of lease and term options available to finance your equipment acquisition.
Interested in Leasing Lab Equipment? Excedr Can Help
When it comes to buying specialized lab equipment, you could end up investing a large amount of your working capital upfront, depending on the type of equipment, units needed, add-ons, and customizations your lab needs. When you’re on a budget, purchasing may not be practical.
Excedr’s lab equipment leasing program allows you to make the most of your budget. Our leases significantly reduce the upfront costs required, and repairs and maintenance are covered for the life of your lease.
Our long-term equipment rentals can give you the freedom and flexibility to upgrade your instrument at the end of your lease term.