Financing Agreement Types

Equipment Finance Agreement (EFA)

The EFA is in actuality a loan to the customer (debtor) using the equipment asset as collateral. The debtor usually pays for the equipment and takes all the ownership benefits and responsibilities. The creditor (usually SeaCliff Capital) reimburses the debtor for the equipment and collects the monthly payments. The creditor holds a security interest in the equipment until the loan is paid in full.

Finance Lease

Fixed-term (and usually non-cancelable) lease that is similar to a loan agreement for purchase of a capital asset on installments. The lessor’s services are limited to financing the asset, the lessee pays all other costs including insurance, maintenance, and taxes. Capital leases are regarded as essentially-equivalent to a sale by the lessor, and a purchase by the lessee (even though the title remains with the lessor). Therefore, leased assets must be capitalized and shown in the lessee’s balance sheet as a fixed asset with a corresponding non-current liability (lease payable). The lessee acquires all the economic benefits (such as depreciation) and risks (such as the possibility of the loss of the leased asset) of ownership but can claim only the interest-portion (not the entire amount) of the lease payment as an expense.

True Lease

Multi-year lease arrangement in which the risks and rewards of ownership are retained by the owner (the lessor) of the leased asset or property, whereas the lessee retains its possession and use for the lease period. The lessor claims the depreciation benefits and the lessee claims the lease payments as capital expense. Called ‘true’ because they pass the accounting requirements for the lessor to claim the tax benefits, such leases offer comparatively lower lease payment or rent. An operating lease is a true lease whereas a capital lease is not. Also called tax lease or tax-oriented Lease.

Operating Lease

From a financial reporting perspective, a lease that has the characteristics of a usage agreement and also meets certain criteria established by the FASB. Such a lease is not required to be shown on the balance sheet of the lessee. Also operating leases are such that lessors have taken a significant residual position in the lease pricing and, therefore, must salvage the equipment for a certain value at the end of the lease term in order to earn its rate of return.