15
May
2016
0

What Is Equipment Lease Financing?

As a direct consequence of the commercial lenders and financial institutions being extremely cautious, even skittish about how they are prepared to give money to, this has meant that business owners have now had to try and secure alternate sources of financial support and aid. Sometimes, a business may require a particular item of machinery for the purposes of carrying out the trade of the business more effectively, but lacks the capital to purchase the machinery outright.

Alternatively, the company may have the capital necessary to make an outright purchase but is ultimately cautious and wary about doing so because they are not entirely confident as to the practical benefits that the machinery will provide them. Specifically, there maybe some degree of concern about the possibility that the machinery may provide only a limited degree of benefit for the business owner, and where that aid does not justify the rather costly nature of the machinery itself.

With that in mind then, one option that the business owner may wish to make use of is relying upon equipment lease financing. Under this scheme, the company will effectively lease a particular asset, such as an item of machinery, a vehicle or a building from a finance company. The finance company (also referred to as the lessor for the purposes of the equipment lease financing agreement) will be the legal owner of the asset in question.

However, the lessee (the business that is leasing the asset from the finance company) will be legally entitled to possess the asset and use it in the course of their business. Over a period of time that will be agreed upon by the lessor and the lessee, the lessee will pay the lessor a sum of money at regular intervals such as on a monthly basis.

The payments made by the lessee will go towards the settlement of the capital sum owed in relation to the asset in question, and the lessor will benefit from the arrangement because they will receive a sum of money as interest in addition to the principal sum that the lessee is liable to repay as per the terms of the equipment lease financing agreement.

At the end of the final payment being made, the lessee will reserve the right to finally take full and unhindered legal title of the asset which means that in the eyes of the law, they are now the rightful owner of that asset.

This is significant because it then means that the lessee company can use the asset as collateral for a loan that they intend to take out. It can also be sold, if this is what the company deems to be best in the circumstances.

The benefit with this type of arrangement is that the business will be able to carry out and properly perform the duties of the business without having to worry about a significant withdrawal from the capital fund then affecting the business and the solvency of it overall. Therefore, this arrangement is optimal for ensuring a good cash flow.