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An equipment lease agreement is a contract where the lessor (owner) lets the lessee (borrower) use the equipment for a stated period in exchange for payments. It is to be noted that the lessor is the owner of the equipment. The equipment's subject can be anything ranging from vehicles to factory machines or any other equipment. On the other hand, the lessee is the consumer concerned who is aiming to borrow the equipment. To agree on the lease, both parties come together to discuss the terms and conditions. A certain amount of payment is decided based on the duration of the lease. However, despite the agreement, the lessor has the right to terminate the equipment lease. This can arise when the lessee or the borrower engages in illegal activities.

Steps to Prepare for an Equipment Lease Agreement

Below are the steps you need to prepare for an equipment lease agreement:

  1. Identify Equipment Needs. The first step to preparing for an equipment lease agreement is identification. You should identify the equipment you need for the firm and also look at its associated costs. This will prevent you from wasting your time, thus allowing you to get the equipment rapidly.
  2. Review Finances. Next, you need to review your finances and budget. Thus, carefully review your company's finances and decide if the leasing option is affordable. This can be achieved by checking your firm's cash flow, credit history, and other financial obligations.
  3. Determine the Time Range of the Equipment. Deciding the period until you want the equipment is a necessity. This is because it influences the rental services, which are mainly short-term rentals and facilities that offer equipment sharing. If it is for a short period, choose a short-term rental service. For an extended period, you can consider a loan or credit. However, decide on it carefully, as banks are known to deny 85% of applications.
  4. Research about the Equipment. Thorough research about the equipment is necessary. This is solely because it should be connected to the latest technology. This will help in making a better investment and thus effectively determine the equipment’s nature.
  5. List out Different Leasing Companies. Evaluating companies providing leasing services is paramount. Certain lease lengths, monthly payments, and end-of-lease options may be favorable for you. Thus, list out the companies you might want to collaborate with and give it a go.
  6. Decide on Leasing the Equipment. Although the equipment might favor you, some companies may not deal in leasing the instrument. Thus, reach out to the firms you have shortlisted and enquire about them. Some companies specialize in specific industries. Approaching them makes your experience easier as you get additional guidance, too.
  7. Organize the Documents. After this, organize the documents and other requirements needed to lease the instrument. The documents can include balance sheets, income statements, etc. Please note that the documentation process differs from company to company. Thus, you must cater to the needs of any company for which you might want to lease the instrument.

Note: You can consult a lawyer to review your equipment lease agreement if you already have an agreement.

Steps Involved in Applying for an Equipment Lease

The following are the stages of an equipment lease application.

  1. Meet the Lease Company. The first thing is to meet with the lessee and lessor. Also, they get to know about their choice in leasing options, types of equipment that are being leased, and others. The company also gets to know its lessee’s requirements.
  2. Apply with Required Documents. Following up on this document requires gathering all required papers. Financial statements, credit history, and other necessary documents have to be collected for underwriting by the company so as not to approve or decline your request.
  3. Undergo Document Review and Underwriting. In the third process, it is expected that there will be a review of your submitted documents. During this time, there will always be an underwriting process involved, too. Prepare for this stage and equip yourself with the necessary information so that you can get the equipment before.
  4. Receive a Lease Estimate. If your application passes through successfully, a preliminary lease estimate will be sent to you. It should contain the costs and terms of the lease based on available data. Be cautioned that any mistake issued from this point might lead you to problems in the future.
  5. Review the Lease Terms. Also, look through any terms about leasing before signing it. The interest rate must thus be noted down carefully; how often do I pay? This is open for negotiation if one wants, but generally, lease agreements tend not to be negotiated upon.
  6. Sign the Lease Agreement. Having a clear understanding of these guidelines is paramount when appending your signature hereafter. Signing can be made online or physically where applicable. Each company has different guidelines; thus, follow them correctly in such situations.
  7. Fund and Receive the Equipment. The leasing company gives out money after making an initial payment towards buying what is needed most currently. Not only that but then if you keep buying from manufacturers, it may also lead them into paying directly for these things, hence becoming costly too. The time within which these items will serve depends on who made them.
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Types of Equipment Lease Agreements

Each type of equipment lease agreement is different. This is because they cater to the various needs of various lessees. Thus, you must know the various types of equipment lease agreements.

  • Operating Leases: An operating lease is defined as a type of equipment lease agreement that permits one firm to use another company's equipment. This is done in exchange for fixed monthly payments over a specific period decided over by the lessor and the lessee. Several criteria must be met to define a lease as an operating one. One of them includes the ownership transfer. Operating leases are also termed as Fair Market Value(FMV). This occurs when the option to purchase a piece of equipment has the fair market value attached.
  • Finance Leases: Finance Leases, also known as Capital Leases, grant a lessee the right to use a lessor's equipment. However, they are not like operating leases. This is because a finance lease is treated like a loan and involves the ownership transfer from the lessor to the lessee. Thus, the lessee is responsible for maintaining the asset and paying any insurance and taxes related to the equipment. Finance Leases are preferred by firms when they are renting out expensive capital equipment.
  • $1 Buyout Lease: A $1 Buyout Lease works the same way as a capital lease. In this, the lessee makes monthly payments for their preferred equipment. The payment continues until the end of the lease period when the lessee can buy the equipment for a lower price than its FMV(Fair Market Value). The company is guaranteed the option to buy the equipment for $1, thus the term '$1 buyout lease'.
  • Purchase Option Lease: It is a type where an equipment lease agreement with a $10 purchase option lease, the lessee has the option to buy the equipment at the end of the lease for 10% of the original purchase price. It is to be noted that 90% of the lease is paid upfront through monthly lease payments. The lessee is also given a chance to opt out if the equipment does not cater to their needs in the long term.

Other types of equipment lease agreements are the following:

  • Sale-Leaseback
  • TRAC Lease

Key Terms for Equipment Lease Agreements

  • Dollar Buyout: The option for the lessee to purchase the property leased at $1.00, provided that they have not defaulted in any way.
  • Estimated Useful Life: Estimation of what period is expected for a useful life of leased equipment.
  • Estimated Residual Value: This refers to the “fair market value” of the asset when the term lease agreement ends.
  • Effective Lease Rate: What is left behind as a result of cash flows when leasing is done.
  • Fair Market Value Purchase Option: An option to purchase leased property at the end of the lease term at its fair market value.

Final Thoughts on Equipment Lease Agreements

Prepare well and apply for the correct equipment lease suiting your firm's needs. Following these steps will sincerely benefit you in gaining the right equipment lease agreement. Thus, implement them carefully.

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ContractsCounsel is not a law firm, and this post should not be considered and does not contain legal advice. To ensure the information and advice in this post are correct, sufficient, and appropriate for your situation, please consult a licensed attorney. Also, using or accessing ContractsCounsel's site does not create an attorney-client relationship between you and ContractsCounsel.

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