We are often asked by customers what is the difference between an Equipment Finance Agreement and a Lease Agreement? An equipment finance agreement can be viewed as a bridge between a lease and a loan. If you put an equipment finance agreement and lease agreement side by side , you will notice the terms and conditions are virtually identical. From the perspective of an end user’s obligations contained in a lease or finance agreement, they are the same. An EFA is similar to a loan and EFA’s use terms like “lender” and “borrower” instead of “lessor” and “lessee.”
The major reason for equipment finance agreements is the avoidance of liability upon the lessor. For example, if you want to lease medical equipment and the use of the equipment causes an untimely death, a creative attorney may sue the owner of the equipment. Who is the owner under a lease? The lessor. Who is the user? The lessee. Both the owner and user could be subject to litigation, and the finance provider will not. Recent laws have been enacted to protect lenders of money from this type of litigation.
There is the option with both equipment leasing and equipment financing to own the equipment at the end of the term. The real advantage of equipment finance agreements is when you compare them to bank loans. With a bank loan, the bank often applies a lien on all your assets, including accounts receivables, as collateral for the loan. In other words they secure everything you own and will acquire in the future. On the other hand an EFA or lease is not secured by all your present and future assets but is specific to the equipment being financed or leased.
Also many bank loans are not fixed rate and are tied to a market rate which may go up over the term of the loan. Bank loans frequently contain restrictive loan covenants that require the customer to maintain certain financial ratios, these ratios may restrict the customer’s ability to borrow future funds. In the event the customer violates one or more of the covenants, the lender has the right to demand payment in full of the outstanding loan amount, even though the loan payments have been made on time.
Consult with your tax advisor on the tax benefits of equipment ownership through an equipment finance agreement vs. total write off of lease payments through a lease. Madison Capital can offer either a lease or EFA and will work with you to address your needs.
