Drawing the Fine Line Between Leases & EFAs

by Linda P. Kester Jan/Feb 2015
In a mock sales Q&A, regular Monitor contributor Linda Kester describes how to approach a potential client’s question: “What’s the difference between an equipment lease agreement and an equipment finance agreement?”

You’re on a sales call. You’re talking with a prospect. You’re feeling good about the conversation, confident in your abilities and assured that you’re about to start a new relationship. You are asked a “by-the-way” question that catches you off guard. The question: “What’s the difference between an equipment lease agreement and an equipment finance agreement?”

Not only will you get this question from a prospect, but as an FYI, at the NAELB Leasing School we frequently get questions about equipment finance agreements, bank loans and standard lease agreements. Equipment finance agreements are being used more and more. So here are some questions you may be asked, followed by my suggestions on how to answer them to close the sale:

Q: What’s the difference between an equipment lease agreement and an equipment finance agreement?
A: If you put an equipment lease agreement and an equipment finance agreement side by side, you will see that the terms and conditions are virtually identical. From the perspective of an end user’s obligations contained in a lease or finance agreement, they are the same. You have to make monthly payments, insure the equipment, not be in default and not have misrepresented your credit strength, for starters.

Q: Then what’s all the fuss about? People have told me never to lease, but to always use an equipment finance agreement. Why?
A: To understand the fuss, let’s look at how and why equipment finance agreements developed. The major reason for equipment finance agreements is the avoidance of liability upon the lessor. If you want to lease heavy construction equipment and the use of the equipment causes an untimely death, creative lawyers are going to sue the owner of the equipment. Who is the owner under a lease? The lessor. Who is the user? You. So without a doubt, both the owner and the user will be involved in litigation in that situation. Under an equipment finance agreement, the owner of the equipment is you, the user. So only you, the user, will be involved in litigation and the finance provider will not be, unless there’s some creative lawyering. And of course, laws have changed to protect lenders of money from litigation just like this.

Q: I don’t use construction equipment in my business, I need office equipment. Why is an equipment finance agreement even presented to me as an option?
A: It’s all about what makes lenders feel comfortable. As the popularity of equipment finance agreements grew over the years, lenders saw leases as outdated, behind the times so to speak. But just like good fashion, equipment leasing never goes out of style. You can look at an equipment finance agreement as a bridge between a lease and a loan. Once we determine your exact needs, we can see which one will work better for your company.

Q: I was told that in an equipment finance agreement, I automatically own the equipment at the end of the term. Can I do that with leasing?
A: Of course you can. Leasing equipment with a nominal end of term purchase option has been around since the beginning of equipment leasing. When you lease you can either return the equipment at the end or exercise your purchase option.

Q: If leasing and equipment finance agreements are so similar, I have to ask you once again, why the fuss?
A: Well, the obvious advantage is the accounting treatments associated with ownership of equipment. Consult your CPA on that issue and see if the tax benefits associated with ownership of equipment outweigh the benefits of the tax benefits of a total write off of payments under a lease agreement. But the real advantage of equipment finance agreements is when you compare them to typical bank installment loans — when you compare apples to apples on a proposed bank loan with an equipment loan.

Q: What do you mean by that?
A: OK, here’s the big difference. In a bank loan, the bank typically puts a lien on all of your assets — including accounts receivables you’re owed — as collateral for the loan. In other words, they secure everything that you have and that you are going to acquire during the term of the loan. Not only do they take your all your present assets as collateral, but all your future assets as well. On the other hand, an equipment finance agreement (or a lease for that matter) is not secured by all your present and future assets, but is specific to the equipment that is being financed or leased.

Also, don’t forget that many bank loans are not fixed monthly payments. They are indexed to a market rate and the payment may go up over the term of the loan. Don’t forget about those restrictive loan covenants that banks impose upon their borrowers. Either rate adjustments or restrictive loan covenants can wreak havoc on a budget and neither one of those constraints exist in an equipment finance agreement or a lease.

Q: So what do I do?
A: First and foremost, consult with your tax advisor on the tax benefits of equipment ownership through an equipment finance agreement versus a total write off of equipment lease payments under a lease. In my mind, that’s the primary difference for your type of equipment. Depending upon that answer, we can process either a lease or an equipment finance agreement to meet your financing needs with your best interests in mind.

Q: Thank you, I should have been financing with you a long time ago.
A: Better late than never! What other transactions do you need help with?

Linda P. Kester is a bestselling author and professional speaker with 20 years of experience in leasing sales and marketing management. As founder of the Institute of Personal Development, Kester has helped hundreds of salespeople increase their volume. Her book, 366 Marketing Tips for Equipment Leasing, has produced results for leasing companies in the U.S., United Kingdom and Australia. For more information, visit www.lindakester.com.

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