Equipment Leasing 101: Choosing Between a Fair Market Value and $1 Buyout Lease

Last week, TIP Capital got back to basics by discussing the main parties involved in a lease transaction – the lessee, the lessor and the vendor/manufacturer – and the advantages TIP Capital gives customers as an independent financing company.

This week, we continue the Leasing 101 series by explaining typical end of lease purchase options available to a customer when the lease terminates at the end of his or her selected monthly term. In the equipment leasing industry, the “standard” buyout options consist of Fair Market Value (FMV) and $1 Buyout (or $1 Purchase Option) with a term ranging from 12 to 60 months.

  • A Fair Market Value Buyout allows the customer to utilize the equipment for a designated number of months with end of lease options to continue to lease the equipment, return the equipment and upgrade to new equipment, or purchase the equipment at the then determined fair market value price of the equipment.  A FMV lease also is known as an operating lease.
  • A $1 Buyout/Purchase Option has a higher monthly payment than a FMV lease, but this lease is selected by a customer who wants to own the equipment at lease end for $1. This lease also is known as a capital lease. Most of the time, the equipment ownership is transferred from the lessor (TIP Capital) to the lessee (customer) unless the customer decides to return the equipment for remarketing or disposal.

As stated above, the customer selects the buyout option and the length of the equipment financing term, which consists of a fixed rate monthly payment that does not fluctuate during the lease – unlike other financing options such as credit cards or bank loans. These “other” financing methods also can eat away at your operating budget.

When considering an equipment leasing buyout, your business or municipality needs to consider the equipment type and its lifecycle before selecting the FMV or $1 Buyout purchase option.

  • Customers typically select a FMV buyout for IT, computers, servers, software, security systems GPS, or other technology-based equipment to avoid equipment obsolescence due to the ever-changing dynamics of today’s – and tomorrow’s – technology-based equipment.
  • Customers typically select a $1 buyout for longer lasting equipment such as construction, automotive repair, material handling, tooling, cleaning equipment and pressure washers due to the longer lifecycle of these assets.

As our customer, TIP Capital will develop a competitive, fixed rate equipment financing option to match your preferred buyout option and lease term and acquire the equipment to complement your business needs without a large upfront down payment or worry of technological obsolescence.

In next week’s Leasing 101 lesson, TIP Capital will explain some special leasing buyout programs geared to fit your business including a FMV Tech Refresh lease, step lease and other financing solutions.

If you have an immediate interest in leasing equipment, you can complete a Credit Application and fax to 248.593.7263 or e-mail it to tip_credit@tipcapital.com to start the process. If you are a vendor seeking a competitive third-party equipment financing program, you can contact TIP Capital at 248.593.3928 or through our Contact page.

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