Loans are defined as an agreement between a lender and a borrower in which the lender advances funds to the borrower and the borrower agrees to repay the advance over an agreed period of time and with interest. In order to reduce the risk to the lender, the lender takes a security interest on the collateral being financed or on other assets owned by the borrower

A loan agreement will typically provide for an early payoff by the borrower. The payoff provision will generally allow for a discount to be realized on the remaining interest due.

The easiest way to determine if a finance contract is a loan or a lease is to look at the name of the owner/purchaser on the Bill of Sale or on the lien filing. If the borrower is listed as the owner, the type of financing is most likely a loan. If a bank or finance company is listed, then the contract is most likely a lease.

For tax purposes, any collateral that is financed with a loan is depreciated by the owner/borrower.

Term Loan and Conditional Sales Contract – This type of financing is a fixed rate contract that is secured with the collateral being financed. The purchaser/borrower does not completely own the equipment until the contract is paid in full and the lien is released. A Term Loan is generally fully amortizing. However, the lender and borrower may agree to a balloon payment at the end of the term.

Equipment Finance Agreement – This contract, more commonly referred to as an EFA, is a finance contract that bridges the gap between a lease and loan. The contract works as loan and is generally a fixed rate, fully amortizing agreement. The borrower is considered the owner of the equipment and the lender collateralizes the loan with a lien on the asset(s) being financed. This type of contract was created to permit leasing companies the ability to offer a more traditional loan product. Some of the language in an EFA contract is similar to that of a lease so that the lender can adhere to lending regulations.

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Leases are basically a long-term rental agreement. The lessee agrees to take possession of the equipment and make scheduled payments to the lessor. The lease payment includes a portion allocated to the depreciation of the equipment during the lease term as well as an amount that is the time value of money or the cost of funds. Therefore, a lease does not have an interest rate, but instead the lease payment is calculated using a lease factor.

A Lease Agreement in non-cancellable, meaning that the lessee is obligated to make the payments for the entire term. Therefore, should a lessee wish to pay their lease early, they would not receive a discount. Additionally, since the lessee is the user of the equipment, they are required to carry both property and liability insurance at levels agreeable to the lessor.

Nominal Purchase Option/Capital Lease – A nominal purchase option lease is typically recognized by its buy-out provision. At the end of the lease term, the lessee may purchase the equipment for a nominal amount, usually $1.00 to $101.00. For tax purposes, this type of contract is considered a conditional sales contract.

Finance Lease – A finance lease typically has a predetermined residual value that is low enough to be attractive for the lessee to purchase the equipment at the end of the term. This purchase option is typically 10% of the original equipment cost. For tax purposes, the lessee can treat this lease as a conditional finance contract providing that the lease term is as long as the equipment’s useful life.

Fair Market Value Lease – A Fair Market Value lease is also known as an FMV lease. This type of lease has an end of term buy out provision that states that the lessee may purchase the equipment for the fair market value as valued at the end of the lease. The lessor assumes the risk of the valuation and charges a factor commensurate with that risk. The lessor is the owner of the collateral and is entitled to depreciate the equipment. The lessee treats the payment as an expense and the collateral does not appear on the lessee’s balance sheet.

First Amendment Lease – This type of lease allows the lessee to exercise a purchase option (usually for the FMV) at a predetermined period during the lease term. If the amendment is not exercised, the lease renews.

TRAC Lease – A TRAC lease is a Terminal Rental Adjustment Clause lease agreement. This type of lease contract is almost exclusively used for titled equipment. For this type of lease contract, the lessee agrees to a predetermined residual value. If the actual residual value is less than the agreed to amount, the lessee must pay the difference. If the residual value is higher than the predetermined amount, then the lessee is entitled to a portion of the difference.

Other Types of Financing

Inventory Finance – Also known as floorplan financing, this type of financing is used to finance inventory (typically equipment) for dealers. This financing is similar to a line of credit and allows a dealer to purchase inventory and not make payments on that expenditure for a period of time. During this “free period”, the dealer can sell the equipment at their cost. If the “free period” expires prior to the inventory being sold, the dealer will be required to make interest and/or principle payments until they sell the equipment or the equipment is fully paid for.

SBA 7(a) Loan – This type of loan can be used to purchase equipment, commercial real estate or for business acquisitions and working capital. The loan term is determined by the purpose of the loan. The interest rate is floating and is tied to the Prime Rate. The Loan to Value rate of a 7(a) loan is typically 90%.

A 7(a) loan is issued through an approved bank lender. The underwriting process is typically a little more rigorous than a conventional loan due to the guaranty that the lender receives from the United States Small Business Administration. Because of this guaranty, the lender can be more aggressive on the loans that they wish to approve.

Export Finance – Oakmont Capital Services offers various types of financing for transaction outside the United States. To see if we can help, please contact us and we will quickly evaluate whether we can meet your needs.

Portfolio Purchases – If your business finances equipment for short or long terms and you desire to limit your risk or re-capitalize your investment, we would like the opportunity to purchase that portfolio. Please contact us to discuss.


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Oakmont Capital Services (Headquarters)
1398 Wilmington Pike, Suite 200
West Chester, PA 19382
Direct  (610) 892 8670
Toll-Free  (877) 701 2391
Fax  (800) 843 2948

CFLL #60DBO 91777

Oakmont Capital Services (Minnesota Offices)
131 8th Street South, Suite 1
Albany, MN 56307
Direct  (320) 844 8800
Toll-Free  (877) 701 2391
Fax  (800) 843 2948

CFLL #60DBO 93550

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