Lake Union Financial

Financing Definitions

Understanding some of the jargon used by financing companies is often helpful. Listed below is a glossary of terms. If you understand these terms, it will help in better understanding a finance company and transactions. We hope they are of some use. We have tried to define each term without use of other technical and jargonistic terms to provide a clear understanding of the defined term.

Broker An intermediary between the customer and funding source. The broker arranges the financial transaction. The broker is usually paid some fee by the funding source for its services.

Capital Lease A specific classification of a lease for accounting purposes. The classification of the lease will determine how the lease is to be accounted for. A lease is accounted for by the customer as a capital lease if it meets one of the following criteria:

  1. (a) at the end of the lease, the customer owns the property being leased;
  2. (b) at the end of the lease, the customer can purchase the property for a bargain purchase option;
  3. (c) the lease term exceeds 75% of the estimated economic life of the leased property;
  4. (d) the present value of all lease payments is equal to 90 percent or more of the cost of the leased property.

Capped Fair Market Value A provision in the lease allowing the customer to purchase the leased property for its fair market value, but not exceeding a certain amount. The advantage of the cap is that the customer will know the maximum payment required to purchase the leased property.

Certificate of Acceptance A written verification by the customer that they have received the property to be leased. Most leases and Finance Agreements begin after the date stated on the certificate of acceptance.

Coterminous Two or more leases that end at the same time.

Cross Corporate Guaranty A guarantee by one corporation to pay the lease obligations of another corporation.

Default If a customer does not comply with the terms of the contract, a default occurs. Generally, after a default, the lender can exercise all of its rights under the contract to repossess the property and seek monetary damages.

Direct Finance Lease Same as a capital lease except this accounting classification only applies to a lessor. Why FASB chose two names for the same term, only they in their infinite wisdom know.

Dollar Buyout An option at the end of the contract to buy the leased property for $1.

Economic Life of Leased Property The estimated time the leased property can be used with normal repairs and maintenance.

Equipment Finance Agreement (EFA) An Equipment Finance Agreement (EFA) is Lake Union Financial's version of a standard loan. This type of contract is our most popular product because it's familiar and easy to understand. An EFA allows you to depreciate your equipment over 2-5 years while writing off the interest paid within a given tax year. An EFA allows you to take advantage of the IRS's Section 179 depreciation schedule.

Fair Market Value The technical definition of fair market value is the price a willing buyer will pay a willing seller for leased property on an "as is, where is" basis with both under no compulsion to either buy or sell. In reality, this is a vague term, often creating a question between a lender and customer regarding what is the fair market value. Stated another way, what will someone pay for the property at the end of a contract?

Fair Market Value Purchase Option Similar to a purchase option, this lease term gives the customer the ability to purchase the property at its fair market value at the end of the contract.

FAS 13 Technically, this is the statement of Financial Accounting Standards No. 13 entitled "Accounting for Leases". This book sets forth standards for how parties to a leasing transaction should account for such transaction.

FASB This is the Financial Accounting Standards Board. This is the group that, on high, dictates the general accounting policy and theory which is to be followed by both internal accountants as well as external auditors.

FAZBEE Another name for FASB.

Financial Statements Accounting statements that provide specific information about a company's financial position. They include the Profit and Loss Statement, also known as the Income Statement, the Balance Sheet, and the Statement of Cash Flows. Financial statements can be audited by an outside CPA firm or be unaudited and, thus, prepared by the customer.

Financing Statement This is a document specified under the Uniform Commercial Code, a law applicable in all states. This puts the world on notice that a security interest has been filed against the person on the form listed as the debtor.

Hell or High Water Clause This is a provision in a lease agreement which indicates the lessee (customer) is required to pay the lease payment for the entire term of the lease. Problems encountered by the customer with the leased property are not valid reasons for withholding lease payments.

Interim Rent Rent paid for an interim period of time. Many contracts begin at the start of a period such as the first of the month. If leased property is received and a certificate of acceptance is signed prior to that date, often there is an interim period between the acceptance and the start of the first lease rental. This period of time is called the interim term during which the interim rent is paid. The interim rent is generally calculated as a percent of the standard monthly rent prorated over the number of days in the month the customer has use of the property.

Investment Grade Credit Generally refers to a customer of high credit standing. Technically, an investment grade credit is a company rated highly by one of many recognized credit agencies such as Standard and Poor's.

Lease A contract giving the customer the right to use the leased property for a period of time.

Lease Line A line of credit similar to a bank line of credit. It allows the customer to easily add additional property under the same terms and conditions without negotiating additional agreements.

Lease Rate Factor This is a percentage which when multiplied by the cost provides a periodic rental. It is a helpful number when used by either a sales person or the customer. In the event the cost of the property is either not exactly known or may change, having the lease rate factor allows a quick recalculation of a lease payment when that number becomes known.

Lease Term The fixed term of the lease.

Lessee The user of leased property under the lease. (The Customer)

Lessor Depending on the type of lease, either the owner of the leased property or the owner of a security interest in the leased property. (The Lender)

Letter of Credit A specific arrangement between a customer and one of its banks. The bank agrees in the event of a defined event, the lender can look to the bank to make payment instead of the customer. This is similar to a security deposit in that it is one way for a lender to insure that it will be paid under a lease contract.

Master Lease The primary document between the lender and customer containing all of the general terms and conditions for leasing. Individual leases can then be relatively short and incorporate the master lease by reference. It is a very convenient administrative document so that once agreed, legal terms and conditions never need to be negotiated again.

Middle Market Credit A customer without an investment grade credit rating, but generally with sales greater than $50 million annually.

Municipal Lease Same as a capital lease except that the customer is a public entity. Although the product and features are identical, the legal documentation is different because of the unique status of public entities.

Net Lease Any lease where all costs in connection with the use of the leased property are paid by the customer and are not part of the periodic lease payments. For instance, maintenance, insurance and taxes are paid directly by the customer. Capital leases are generally net leases.

Operating Lease Another accounting classification for a lease. A lease that does not meet the criteria for a capital lease is an operating lease. With an operating lease, the lender is generally taking a risk that at the end of the term the lessee will either purchase the leased property, renew the lease, or the leasing company can remarket the leased property for its residual value.

Personal Guarantee The guarantee of someone to be individually responsible for the obligations under the contract. Generally for Subchapter S closely held companies and small businesses, a leasing company may ask for a personal guaranty as a way to insure that the lease payments will be made.

Purchase Option Option to purchase the property at the end of the term.

Refundable Security Deposit An amount paid by a customer to provide extra protection to the lender to insure that the customer will pay its obligations under the contract.

Remarketing The process of selling or re-leasing leased property which has been returned to the lender either at the end of the term or as a result of a default in the contract.

Remarketing Fee A fee paid for selling or re-leasing leased property.

Rent Holiday A period of time during which a customer is not required to pay rent.

Residual Value The value of the property at the end of the contract term.

Sale-Leaseback A transaction which involves the sale of property by the customer to the lender and a lease of the property back to the customer.

Security Interest An interest in property that is acquired for purpose of securing payment of a lease obligation. A security interest allows the holder of the security interest to obtain the property in the event of default and gives the holder additional rights in the event of bankruptcy.

Spread The difference between funding costs and the rate of return to the lender on a lease.

Step Down Lease Another variant of the "Step Rental Lease". The lease payments decrease over the term of the lease.

Step Rental Lease A lease where the rent may change during the term of the contract. The change is known at lease inception and is agreed by both the lender and the customer. Often a step rent lease allows the customer to pay a smaller payment initially and more later in the term.

Step Up Lease Similar to a "Step Rental Lease" and a "Step Down Lease" except the lease payment is increased during the term of the contract.

Stipulated Loss Value This is a term in a lease requiring the customer to pay the value of the property in the event there has been some type of damage or destruction to the property.

Term Generally leases run for 12, 24, 36, 48 or 60 months.

Vendor An entity that provides leased property to customers.

Vendor Leasing A working relationship between a leasing company and a vendor to provide leasing to the vendor's customers. In some s sense, the leasing company is working as an extension of the vendor providing credit checking, billing and collecting, documentation, and customer service. The leasing company, generally, is accepting the credit risk.

Back to Top

Copyright © 2010 Lake Union Financial. All rights reserved.


Business Owners
Financing Process
Bank Comparison Building your Credit

Equipment Dealers
Benefits For You
Salesmanship Vendor Profile

Equipment Inventory

Contact Us

Email us