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How Do I Choose the Best Capital Lease Financing?

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  • Written By: Osmand Vitez
  • Edited By: PJP Schroeder
  • Last Modified Date: 24 August 2014
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Capital lease financing is a purchase method that allows a lessee to control an asset and the risk benefits for its ownership. The finance company, however, retains legal ownership. The best capital lease financing options include low start-up fees, no administration costs, specific terms, and an advantageous purchase option. A company must follow specific accounting rules in order to classify a lease under the capital lease term. Otherwise, the lease is an operating lease, and the business fails to receive capital lease benefits.

Companies should look to avoid down payments under capital lease financing. These payments only add to the overall cost to the asset up front, requiring a longer payback period in terms of cash flow. Some capital leases may require a security deposit, however, if the company plans on returning the asset at lease end. In some cases, the security deposit may be negotiable based on the starting terms of the lease. A company may be able to classify a security deposit as an asset rather than an expense.

Administrative fees are associated with capital lease financing as a service charge. Lessors or finance companies may charge these fees up front or on a monthly basis. These charges are expenses as they have no relation to the asset in the lease agreement. Administrative fees may vary depending on the lease life and asset type in the agreement. Companies need to find capital leases that have low administrative fees or none at all.

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Specific, fixed terms are another must in capital lease financing. In some cases, a lease may be for several years due to the asset that the lease agreement covers. Companies need a specific term length in months, low minimum transaction amounts, fixed interest rates, and other favorable terms. They may need to negotiate these terms with the lessor or finance company. Shopping capital lease agreements around multiple finance companies can help a company obtain the best lease agreement.

An advantageous purchase option is necessary in capital lease financing. At the end of the capital lease, the lessor or finance company should be able to sell the asset for $1 US Dollar (USD) or a low percentage of the total asset cost. Companies may be able to negotiate the purchase price in a similar fashion to the lease terms. The purchase price should transfer legal ownership of the asset. Tax advantages from the lease purchase should also exist; it may require the use of a tax lawyer to ascertain the benefits.

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