Not All Equipment Leases are the Same
A lease may seem like a straightforward term, meaning you make payments on business equipment for a set amount of time and once the leasing term ends, the equipment may be returned to the lessor. In the simplest terms, a lease is a rental agreement in which you pay for the use of equipment for a set amount of time. The two most common leases are fair market value (FMV) leases and capital leases. However, like many financial aspects, there are decisions a business owner must make regarding the type of lease that best suits their financial position, type of business, and type of equipment.
Based on the conversations our team has every day with business owners, we can help shed some light on the benefits of both leases and help you determine which one is best for your situation and goals, both long and short term. Today we will address a Fair Market Value Lease.
What is a Fair Market Value (FMV) Lease?
A FMV lease derives its name from the lessee’s option to purchase at fair market value the equipment at the end of the leasing agreement. The price is determined at the end of the lease. FMV leases also are referred to as operating and true leases – operating because the lease payments are recorded as an operating expense and true because they work like a basic rental agreement.
What are the Benefits of Fair Market Value Leases?
- Monthly lease payments offer an opportunity to add equipment to your business that you might not be able to afford otherwise, which in turn could make your company more efficient and profitable.
- FMV leases keep equipment off the books as an asset or a liability since it is never purchased and the lease payment is a deductible operating expense. Since it’s not an asset, the equipment doesn’t increase your company’s value. And because it’s not a liability, it doesn’t increase your debt. Depending on your future business plans, both of these situations could work in your favor.
- Generally, FMV leases have lower monthly payments for shorter terms. They are often a viable way to get equipment needed for a short amount of time or for a specific project without taking on debt or the hassle of selling it once the project is over.
- FMV leases give you the luxury of time to assess the equipment’s performance and usefulness to your operations. If it doesn’t help you meet your goals, you return it at the end of the lease. If it does, you can purchase it at fair market value once the lease expires.
For Which Types of Businesses are Fair Market Value Leases Ideal?
FMV leases can act as insulation against obsolescence. They are ideal for business owners in the technology sector or another industry in which technology quickly evolves. Rather than investing in equipment that will need to be replaced soon after new technology hits the market, a fair market lease for such equipment lets you return it at the end of the lease. Then, you can enter into a new FMV lease for the latest equipment. Since FMV leases tend to be shorter, your business will never be operating with outdated equipment, unless you decide it sufficiently serves your needs.
Talking with your accountant and Global Financial & Leasing Services can help point you in the right direction of a lease that fits your goals and financial situation.