Equipment Financing: What’s a Fair Market Value Lease?
A Fair Market Value (FMV) Lease is a popular option for businesses looking to obtain new equipment without purchasing it. Often commonly referred to as an Operating Lease, it works like this: You finance 100% of the invoice for the equipment and a lease term is set. The lessee then makes regular monthly payments for their leased equipment. At the end of the term, the lessee is given three options:
- Purchase the equipment at fair market value (in some cases, cost caps may be available).
- Return the equipment and end the obligation.
- Continue leasing on a month-to-month or annual basis, pending credit approval.
While this arrangement is straightforward, it has numerous benefits for the lessee—and that's perhaps why Fair Market Value Leases are popular for a variety of assets, particularly those that may become obsolete quickly.
The Benefits of a Fair Market Value Lease
While each situation is unique, there are several reasons why many businesses choose what's often referred to as an Operating Lease for their equipment financing needs.
No or low equity required. In many instances, you can finance the full cost of the equipment, or even finance over 100% of the hard costs to cover soft costs like installation and training. (For example, Old National Equipment Finance allows this on some equipment types.1) In other instances you may need to put down some equity, but the amount is typically far lower than what would be required by a traditional equipment loan.
Your lease payments are an operating expense. This means that you can deduct your lease payments against your current earnings, which would lower your overall tax burden. Many business owners find this saves them money, compared to taking Section 179 and/or Bonus Depreciation with a traditional equipment loan. Consult with your tax advisor for details.
Your balance sheet is kept clear. As per ASC 842, you only need to show your minimum stream lease payments on your balance sheet. if you are looking for additional ways to grow your business, or need additional loans, an operating lease has minimum effect on covenants and lending ratios.
You don't have to sell old equipment. Getting rid of obsolete equipment can be a real burden. With an operating lease, you never own the equipment, unless you choose to purchase it at the end of the lease. If you'd rather return it once your term expires, you can.
You buffer against obsolescence. By choosing the length of your lease, you get the power to control when you get new equipment so your business stays up-to-date. And since you have the option to continue leasing at the end of your term, if you feel your equipment could last a little longer, you don't always need to upgrade. That's the beauty of a Fair Market Value lease.
Equipment Financing: Comparison of Options
The easiest way to understand the benefits of a Fair Market Value lease may be a chart. In this instance, we're looking at a situation where a theoretical business is looking to finance $1 million worth of equipment. This is an example only—if interested in your specific situation, please reach out.
| Loan | Lease | Leasing Benefits | |
| Hard Costs | $1,000,000 | $1,000,000 | Finance 100% of hard costs |
| Soft Costs | $100,000 | $100,000 | You may be able to finance soft costs, up to 10% of hard costs |
| Financing Amount | $800,000 | $1,100,000 | Qualify for more financing |
| Equity Required | $300,000 | $0 | A lease may not require any equity |
| Term | 60 Months | 84 Months | You can extend the term to defray monthly costs |
| Balance Due at Maturity | $0 |
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| Typical Options at Maturity |
You own it!
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When you lease, you gain more flexibility and avoid being saddled with outdated equipment |
| Accounting Treatment | Loan Treatment | Minimum payments shown on balance sheet | A low-debt balance sheet means you may be able to secure financing for other big projects |
| Tax Treatment2 | Section 179 and/or Bonus Depreciation | Payments are expensed as rents | Deduct lease payments against current earnings, saving you substantial money. |
Is a Fair Market Value Lease Right for Your Business?
A Fair Market Value Lease, which is often structured as an Operating Lease, may make sense for your business. It typically offers financial flexibility and the possibility of favorable tax treatment, all while keeping your equipment up-to-date.
If you'd like to dig into the details of your scenario, we're happy to talk. We have years of experience—since our inception, Old National Equipment Finance has financed nearly $1 billion to over 10,000 satisfied customers. Why not lean on our expertise?