Why Lease?
Customer Benefits
Leasing equipment or financing software offers a number of benefits to customers in comparison to cash investments or tapping into existing bank credit lines:
Manage Cash Flow
Relevant at all times, but particularly during a lean economic climate when "Cash is King", leasing helps customers manage their cash flow by paying for equipment or software over time.
Leverage Purchasing Power
When evaluating your equipment or software needs leasing provides an effective vehicle to acquire the solution your business really needs, vs. acquiring only what you can afford using available cash from your capital budget.
Preserve Bank Credit Lines
Accessing leasing allows businesses to keep their existing bank credit lines available for short term needs, including inventory, advertising/marketing, and payroll.
100% Financing
Customers can bundle in project costs including equipment, software, maintenance, training, installation, and shipping into one convenient payment plan with minimal initial outlay.
Avoid Obsolescence
Lease terms and types can be matched to the equipment's expected useful life, enabling customers to keep pace with technological changes by upgrading to new equipment.
Tax Advantages
Depending upon the type of lease selected, customers may be able to treat monthly payments as a fully deductible operating expense from a tax standpoint.
Accounting Advantages
While not available for all types of equipment, in some instances Heartland may be able to structure FASB-13 compliant operating leases. Contingent upon review and classification by a customer's auditors, operating lease payments may be expensed as made on the income statement and reflected in the footnotes.
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Lease Types
Heartland offers several types of structures depending upon the customer’s needs and the type of asset being financed.
Installment Loan
An installment loan is a simple “money over money” transaction and is primarily used by Heartland when the customer is acquiring software and services. Using a Master Installment Payment Agreement (MIPA) as the finance contract instead of a lease document is preferred because Heartland is not inserted into the license chain. Customers make the agreed upon number of payments, at which time their obligations are concluded under the MIPA.
$1.00 Purchase Option Lease
Also called a “dollar out” lease, this plan is a capital lease from an accounting standpoint, and considered an installment sale from a tax standpoint. At the end of term the customer simply pays Heartland $1.00 and title to the equipment transfers to them. This plan is best suited for customers who prefer the benefits of ownership and are confident that they will want to keep the equipment working for them after the lease term has expired.
10% PUT
This plan is similar to the $1.00 plan, but instead of a dollar, the customer has agreed in advance to pay Heartland 10% of the original lease amount at the end of term. This “PUT” is a required element of the plan, not an option at end of term, and title to the equipment transfers to the customer. Also considered a capital lease from an accounting standpoint and an installment sale from a tax standpoint. Best suited for customers who want the lower monthly payment compared to the $1.00 plan, but who are sure they will want to take title to the equipment at end of term.
10% Purchase Option
This plan provides customers with a fixed price purchase option at end of term, but customers are not required to exercise it. This type of plan is typically considered a capital lease from an accounting standpoint, and a tax lease from a tax standpoint. This type of plan is not available for all types of assets and term lengths. It is best suited for customers who want to hedge their bets by retaining the flexibility to either return the equipment or purchase it at end of term, but who want to cap the purchase option upfront.
Fair Market Value Lease
This plan provides maximum flexibility to customers who want the lowest monthly payment and aren’t sure they will want to keep the equipment at end of term. It is considered a tax lease from a tax standpoint, and is usually classified as a capital lease from an accounting standpoint. This plan is best suited for customers who prefer the benefits of equipment use, rather than the benefits of equipment ownership. At end of term the customer has three options:
- Return the equipment to Heartland
- Renew the lease
- Purchase the equipment for fair market value (FMV), which is often defined as "what a willing seller and a willing buyer agree to at arm's length"
Custom Structures
Heartland offers customized structures to qualified customers that have special budgetary requirements and need to manage their cash flow. Some of our plans include:
Zero Down Payment
Heartland may be able to offer qualified customers “no payments” for anywhere from one to six months, in order to get the equipment or software delivered and driving an internal return on investment before outgoing payments begin. This plan is particularly advantageous for customers who need the asset now, but want to bridge into the next fiscal year before making payments.
Step Payments
Alternatively, Heartland may be able to offer “step payment” plans with lower monthly or quarterly payments at the beginning of the term, gradually increasing the payments over time.
Seasonal Payments
Heartland will structure seasonally oriented payments that match a customer’s historic cash flows.
Payment Frequency
Heartland offers quarterly, semi-annual, and even annual payment plans to qualified customers.
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Accounting Treatment
The Financial Accounting Standards Board (FASB) differentiates leases based on whether the characteristics of the lease point towards an ownership agreement (a capital lease) or a usage agreement (an operating lease).
Capital Leases
If the lease is classified as a capital lease, the lessee records the liability for the lease payments as debt in the liability section of the balance sheet, and the corresponding asset is recorded as an asset. The interest is expensed on the income statement and the leased asset is depreciated for book purposes. Legal title to the asset does not transfer until the lessee has made the last payment obligation.
FASB uses four criteria in determining whether a lease should be classified as a capital or operating lease. If the terms of the lease meet any one of these four criteria the lease is classified as a capital lease. If none of the four criteria are met the transaction can be classified as an operating lease.
Automatic transfer of title – actual ownership is obtained outright during or at the end of term.
Bargain purchase option – ownership is available through the exercise of a bargain purchase option (i.e., $1.00 or something less than fair market value).
Lease term is greater than or equal to 75% of the asset's economic useful life.
The present value of the minimum lease payments is greater than or equal to 90% of the fair market value of the leased asset at transaction inception, discounted at the lower of either the customer's incremental borrowing rate or the lessor’s implicit rate.
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Operating Leases
If a customer's auditors classify a lease as an operating lease, no asset or liability is recorded on the balance sheet. Instead, the lease (rental) payment is expensed on the lessee's income statement, and the future minimum lease payments are recorded as a footnote to the financials. This "off balance sheet" treatment can make operating leases attractive to customers since their balance sheet ratios relative to debt are improved.
Depending upon several key variables, and their impact on the 90% test particularly, Heartland may be able to assist customers in structuring FASB-13 compliant operating leases. However, ultimately the classification of a lease as either capital or operating rests solely with the customer and their auditors.
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