Fair Market Value (FMV) lease vs. $1 Dollar
Buyout Lease (Equipment Financing Agreement, EFA)

Are you considering adding equipment to improve operations and boost productivity in your business? Instead of buying expensive equipment outright you could consider leasing new equipment. Leasing offers an affordable way to acquire, upgrade, or update business equipment while preserving working capital, cash used to run your daily operations.

Two kinds of equipment leases are available:

FMV vs EFA | American Credit

Here are what you need to know to make the best decision for your company:

Fair Market Value Lease

A Fair Market Value lease, also known as an operating lease, functions like a rental agreement. You don’t own the equipment you’re leasing. A good example is car leasing, where an FMV lease allows the lessee to use the equipment (car) for a pre-arranged time period for a fixed monthly payment. At the end of the lease term, the lessee has the option to purchase the equipment at its then-determined Fair Market Value, continue making your lease payments and using the equipment, return the equipment, or upgrade to new equipment.

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

Equipment Financing Agreement | American Credit

A $1 Buyout Lease, also called a capital lease, is similar to purchasing equipment with a loan through Equipment Financing Agreement. This type of lease is often used when a business plans to keep the equipment for a long period of time, or when equipment obsolescence isn’t a concern.

Comparing FMV and $1 Buyout Leases

Which type of equipment financing is right for your business? Both FMV leases and $1 buyout leases have pros and cons:

FMV lease:

$1 buyout lease/equipment finance agreement

There are some variation to the above two major equipment financing options. One example is the Term Residual Lease acts as a standard option to either purchase or return the equipment at the completion of the original term. The difference under the Term Residual Lease compared to a regular FMV lease is that the standard lease term of 24, 36, or 48 months has been shortened to 22, 33, or 44 monthly payments. If the customer desires to purchase the equipment at the end of the shortened term they may do so by making 2 additional payments on a 22-month lease term (24 payments to own), 3 additional on a 33-month lease term (36 payments to own) and 4 on a 44-month term (48 payments to own). Under the Term Residual Lease the purchase option is spread out over a number of payments.

Which solution works best often comes down to the type of equipment you want to finance, as well as your business cash flow and tax situation. An FMV equipment lease usually makes sense if your business needs to stay current, and you update equipment frequently. If you plan to use the asset for a long time or think you can sell it for a good value when you’re finished using it, then a $1 buyout lease may be the best solution.





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