One way to sell more equipment is to offer monthly payments on each and every proposal you create. By putting the equipment cost in terms of a monthly payment, the customer can conveniently acquire the equipment without writing a big check.
Most equipment leases are classified as either a capital lease or an operating lease. The terms operating and capital lease relate to the world of accounting—more specifically financial reporting.
It’s really pretty simple. So, don’t be intimidated by the next couple of words…
Federal Accounting Standards Board
Or, FASB, for short (often pronounced fass-bee). The FASB classification of a lease depends on whether it looks like the customer is just using the equipment or is purchasing the equipment.
Capital Lease
If the substance of the transaction is a purchase of equipment in the guise of a lease, it’s called a capital lease. If the customer will:
- Most likely own the equipment
- Use it for most of its useful life
- Pay a significant portion of the equipment cost during the term
- Then it is a capital lease. A capital lease is almost the same as a purchase (you are simply defraying the cost over time).
Operating Lease
If your customer is only going to use the equipment, the transaction is considered an operating lease. An operating lease is referred to as an off balance sheet lease because the customer does not show either an asset or a liability in its books. The equipment must have significant value and reasonable use left when it is returned to the leasing company. If the customer wants to:
- Use equipment with out taking ownership
- Only pay part of the original equipment cost
- Keep the lease off their balance sheet
- Then it is an operating lease.
Installment Loan
An installment loan is different than a lease, because a loan is lending money. A lease is lending equipment.
In an installment loan the customer takes ownership of the equipment on day one.
In a lease the customer takes ownership only when & if they exercise the purchase option.
Summary
Very Simply:
- Capital Lease
- Most likely take ownership
- Pay most of equipment cost
- Use for most of useful life of equipment
Operating Lease
- Use equipment
- Only pay part of value
- Use for only part of the useful life of the equipment
Installment Loan
- Immediately own equipment
- Length of loan is based on credit, not on useful life of equipment