By: Sylvia Clubb on January 6th, 2022
A Crash Course on 3 of the Most Common Lease Types
Updated 1/6/2022. Originally Posted 1/28/2018.
If the world of financing and leasing seems like a confusing landscape of options, you’re not alone. Approaching the industry with little to no financing experience can be overwhelming for anyone trying to introduce financing as a viable option for their business.
Like anything new, it’s helpful to understand the nuts and bolts of financing: at GreatAmerica, that’s an introduction to our most popular equipment/software lease types in use by businesses today. We’ll look at the pros and cons of each so you can identify which one is best for your business and your customers.$1 Buyout
The Dollar Buyout lease is what most businesses are familiar with – it's classic, straight-forward, and easy to understand. In this lease type, the customer owns the equipment at the end of term, and they may be able to write off the entire cost of the equipment in the first year under the Section 179 and Bonus Depreciation deductions. Your customers’ tax advisors can explain the nuances of these two tax breaks and how they best fit each situation. The $1 buyout lease has the highest monthly payment compared to other leases.
However, this lease may not be the best choice if the customer has intentions to upgrade their technology as the world changes around them. Nowadays, many businesses would rather upgrade their technology at the end of the term rather than be stuck with something outdated.
Fair Market Value (FMV)
The Fair Market Value (FMV) lease offers a customer the lowest monthly payment for financed equipment. The customer has the option to purchase the equipment at the end of the lease for its fair market value, as described in the agreement. They can also return it, go into month-to-month renewal payments, or upgrade their technology for a brand-new stack. This last option results in a new sale for you and your customer will enjoy the latest technology at roughly the same price as their old monthly payment! For the duration of the lease, the equipment may be treated as a deductible operating expense. Your customers’ tax advisors can confirm how the applicable tax rules apply to them.
If you’re good at talking tech, but aren’t bundling services into your hardware monthly payments, then an FMV may be a good option.
A Rental Agreement is different than a $1 Buyout and FMV because it removes the customer’s purchase option. Instead, the renter has a few choices ranging from returning the equipment or continuing to rent it. As the preference toward subscriptions and monthly payments grows, this has become an increasingly popular option as Solution Providers bundle their services with the equipment payment to offer an As-A-Service-like model.
A rental agreement is used in the GreatAmerica HaaR® program.
Watch: What is Hardware-as-a-Rental?
So which lease should you use? Which is best for your customers? The answer depends on what your customers need, what type of relationship you have with them and what you offer as a part of your solution. Whatever you decide, it’s best to lead with just one lease type that you feel best suits your prospect’s needs and keep the other two in your back pocket so you don’t overwhelm them.
No matter what you offer, all leases are the antidote to sticker shock. By providing a way for your customers to purchase technology through a monthly payment instead of a large upfront cash expense, you may help them obtain a better solution for their technical needs. Plus, your customers don’t have to find their own loan, and can invest their money into other areas of their company with a higher ROI and you win by not tying up your own cash by self-funding.
Build Your Financing Program
While we’ve certainly listed some of the most commonly used lease programs here in this blog, there are many more features and programs available. One size does not fit all. We pride ourselves on our ability to customize programs that drive mutual success for both you and your customers. The right choice for you comes down to your overall business objectives and the needs of each customer you serve. Check out our program selector tool to view available options and start building a program today!