Equipment financing glossary
Know the terms before you sign
Leasing and lending come with their own language, and the fine print is where deals are won or lost. This glossary explains the terms you will see on quotes and contracts in plain English, plus the tax, credit and business-structure terms every owner should know. Search it or jump to a section.
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Six terms that change what you really pay
If you only learn a handful of terms, learn these. They decide your payment, what you owe if plans change and who owns the equipment at the end.
Buyout option$1, 10% or fair market value. It sets your payment and whether you own the equipment.
Lease rate factorCost x factor = monthly payment. Compare factors, not just payments.
Non-cancellableYou owe the full term even if you stop using the equipment.
Soft costsDelivery, install, training and software, often financeable.
Personal guaranteeYou are personally on the hook if the business can’t pay.
Factor rate vs. APRA 1.20 factor on a short cash advance can be a far higher APR than it looks.
Glossary
78 equipment financing terms, in plain English
Leasing basicsTypes of leasesEFAs and loansCosts and feesCredit and legalTax and money mathBusiness structure
Leasing basics
- Equipment lease
- A contract where the lessor (owner) lets the lessee (you) use equipment for a set term in exchange for fixed payments.
- Lessor
- The company that owns the equipment and grants the lease.
- Lessee
- The business that uses the equipment and makes the payments.
- Lease term
- How long the lease lasts, usually 24 to 84 months.
- Lease payment
- The periodic (usually monthly) payment for use of the equipment.
- Residual value
- The estimated value of the equipment at the end of the term. It drives your buyout and your payment.
- Lease rate factor
- A multiplier that turns the equipment cost into a monthly payment. Cost x factor = payment. Example: $50,000 x 0.0215 = $1,075 a month.
- Non-cancellable
- Most leases and EFAs cannot be cancelled. You owe the full term (roughly payment x months left) even if you stop using the equipment.
- Pre-funding
- The lender pays the vendor before the equipment is delivered. Helpful for custom builds, but you carry the risk of delays, non-delivery or wrong equipment.
Types of leases
- $1 buyout lease
- You own the equipment for $1 at the end. Treated like a purchase for tax purposes, so Section 179 may apply.
- Fair market value (FMV) lease
- At the end you can buy the equipment at its market value, return it or upgrade. Lowest payment, best for tech that ages fast.
- 10% purchase option
- You can buy the equipment for 10% of its original cost at the end. A middle ground between $1 buyout and FMV.
- True lease
- A lease where the lessor keeps real ownership risk and the buyout is at fair market value. Payments are usually deducted as a rental expense.
- Capital (finance) lease
- A lease that works like a purchase: ownership transfers, there is a bargain buyout, or it covers most of the equipment’s life or value. You show it as an asset and a liability.
- Operating lease
- A lease that is not a finance lease. Under current accounting rules (ASC 842) most operating leases still appear on the balance sheet, but the cost is expensed as a straight-line lease cost.
- TRAC lease
- Terminal Rental Adjustment Clause lease, used for trucks and trailers. You agree on a residual; at the end you pay or receive the difference between that residual and the actual sale value.
- Sale-leaseback
- You sell equipment you already own to a lessor and lease it back, turning equity into working capital.
- Leveraged lease
- A lease where the lessor borrows part of the equipment cost from a third-party lender.
- Rental purchase option
- A rental where part of each payment builds equity toward buying the equipment.
EFAs and loans
- Equipment finance agreement (EFA)
- A loan-style contract: you own the equipment from day one and the lender holds a security interest until it is paid off.
- Equipment loan
- Similar to an EFA: money borrowed to buy equipment, secured by that equipment.
- Term loan
- A set amount repaid on a fixed schedule with a fixed or variable rate.
- Down payment
- Money you pay up front toward the purchase. Many equipment deals need little or none.
- Advance payment
- Payments collected at signing, such as the first and last month or a security deposit.
- Balloon payment
- A large final payment after a series of smaller payments.
- Collateral
- What secures the deal. In equipment financing the equipment itself is usually the collateral.
- Amortization
- Paying down a debt over time with regular payments of principal and interest.
- Interest rate
- The percentage charged on the principal for using the lender’s money.
Costs and fees
- Hard costs
- The price of the equipment itself.
- Soft costs
- Delivery, installation, training, software and similar costs. Many lenders will finance them.
- Documentation / admin fee
- A one-time fee to prepare and process the lease or loan.
- Origination fee
- A fee to open a new loan or lease, often a percentage of the amount financed.
- Early payoff discount
- A reduction in what you owe if you pay off early. Not every lender offers one, so ask before signing.
- Factor rate
- Used in merchant cash advances: a multiplier on the advance (e.g. 1.20 means you repay $1.20 per $1). It is not an interest rate.
- Cost of capital
- What it costs your business to use money, from debt or equity, expressed as a percentage.
- Compounding
- Earning (or paying) interest on previous interest as well as the original amount.
Credit and legal
- Credit approval
- The lender’s review of your credit, time in business and cash flow before it approves a deal.
- Credit report
- Your personal or business credit history from a credit bureau.
- Personal guarantee
- Your promise as owner to repay if the business cannot. Standard on most small-business deals.
- Lien
- A legal claim on property that secures a debt.
- UCC-1
- A public filing that gives notice a lender has a security interest (lien) in your business assets or equipment.
- UCC-3
- A filing that amends, continues, assigns or terminates a UCC-1.
- Default
- Failing to meet the contract terms, such as missed payments.
- Repossession
- The lender taking back the equipment after a default.
- Judgment
- A court order to pay a debt. Open judgments can block approvals.
- Tax lien
- A government claim for unpaid taxes. It can hurt approvals and the lender’s position, so disclose it up front.
- Contract
- A legally binding agreement between two or more parties.
- Non-disclosure agreement (NDA)
- A contract that keeps shared information confidential.
Tax and money math
- Section 179
- A tax deduction that can let you write off the full price of qualifying equipment bought or financed and placed in service during the year, up to the annual limit. See our Section 179 page and ask your CPA.
- Depreciation
- Spreading the cost of equipment over its useful life for tax and accounting.
- Bonus depreciation
- An extra first-year depreciation deduction on qualifying equipment, often used alongside Section 179.
- Time value of money
- A dollar today is worth more than a dollar later because it can earn a return. The foundation of every finance decision.
- Net present value (NPV)
- The value today of future payments, discounted for the time value of money. Use it to compare lease and loan offers.
- Internal rate of return (IRR)
- The rate that makes an investment’s NPV zero. Used to judge how profitable an investment is.
- Utilization rate
- The share of leased equipment that is actually in use.
- Factor (factoring)
- A company that buys your invoices (receivables) for immediate cash.
Business structure
- Sole proprietorship
- One owner, full control, and personal liability for all business debts.
- Partnership
- Two or more owners sharing profits, losses and management. Includes general partnerships and limited partnerships (LP).
- Limited liability company (LLC)
- Limited liability for owners (members) with flexible tax options.
- Corporation (Inc.)
- A legal entity separate from its shareholders, with limited liability.
- C corporation
- A corporation taxed separately from its owners.
- S corporation
- A corporation whose profits pass through to shareholders’ personal returns, with limits on who can own shares.
- EIN
- Employer Identification Number: the IRS tax ID for a business.
- DBA (fictitious business name)
- A name you operate under that differs from your legal name. Must be registered.
- Articles of incorporation
- Documents filed with the state to form a corporation.
- Operating agreement
- An LLC’s internal rulebook for ownership and management.
- Partnership agreement
- The contract that sets partners’ roles, profit split and dispute process.
- Bylaws
- A corporation’s internal rules for how it is run.
- Shareholder
- An owner of shares in a corporation.
- Board of directors
- People elected by shareholders to oversee a corporation.
- Self-employed
- Working for yourself as a sole proprietor, contractor, partner or LLC member.
- Liability
- Legal responsibility for debts and obligations.
- Dissolution
- Formally closing a business entity.
- Franchise
- Running a business under another company’s brand and system for a fee.
- Licensing agreement
- A contract giving permission to use intellectual property.
- Intellectual property
- Inventions, brands, designs and creative works protected by trademark, patent or copyright.
- Joint venture
- Two or more parties sharing resources, risk and profit on a project.
- Mergers and acquisitions (M&A)
- Combining with or buying another company.
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Why Liberty Capital
Why we teach this
1
Better decisionsKnowing the terms helps you compare offers on total cost, not just the monthly payment.
2
No surprisesWe walk through buyouts, fees and non-cancellable terms before you sign.
3
Tax-smart structureThe right lease type can make a big difference at tax time. Confirm with your CPA.
4
Straight answersAsk us anything. There is no cost and no obligation.
Requirements
What lenders usually look at
- Time in business
- Owner’s personal credit
- Recent business bank statements
- Equipment quote or invoice
- Financials or tax returns for larger requests
See where you stand with the approval indicator.
Special offer
$99 a month to start
For well-qualified businesses (strong credit, 3+ years in business and quality equipment) some programs start at $99 a month for the first 3 or 6 months.
How it works
Ready to put the terms to work?
- Apply in 3 minutesNo fee and no obligation.
- Compare offersWe explain every term on each option.
- SignE-sign when the numbers make sense.
- Get your equipmentWe pay the vendor and you go to work.
FAQ
Equipment financing terms: common questions
What is the difference between a lease and an equipment finance agreement?
With a lease the lessor owns the equipment and you pay to use it, with a buyout option at the end. With an EFA you own the equipment from day one and the lender holds a lien until it is paid off.
What does a lease rate factor mean?
It is a multiplier that turns the equipment cost into a monthly payment. For example, $50,000 x 0.0215 = $1,075 a month. A lower factor means a lower payment on the same equipment.
What is a $1 buyout lease?
A lease where you can buy the equipment for $1 at the end of the term. It works like a purchase, so you may be able to use Section 179.
What is a UCC-1 filing?
A public notice that a lender has a security interest in your equipment or business assets. It is released with a UCC-3 once the debt is paid.
Is a factor rate the same as an interest rate?
No. A factor rate is a flat multiplier on a cash advance. Because advances are repaid quickly, the equivalent APR is usually much higher than the factor suggests.
Questions about a quote or contract?
Send it over. We will explain it in plain English, no strings attached.
Related
All financing subject to credit approval; terms vary by credit, time in business, financials and equipment. Liberty Capital Group, Inc. is not a tax advisor. NMLS #2009539 · CA DFPI #60-DBO49692.