Financing Asset Leasing

April 20, 2020

There are many ways to finance the purchase of vehicles, computers, machinery, equipment and other assets for business or personal use. Perhaps the most common is where the purchaser borrows the purchase money from a bank or other lender to purchase the asset and the bank takes a security interest in the asset against the payment of the loan.

Another approach which may be used more in the acquisition of business assets is called a “Finance-Lease” where there is a three way arrangement between the lessee of the asset (Lessee), the lessor of the asset (Lessor) which is usually a bank or other commercial lender, and the asset vendor (Vendor) which is usually the asset manufacturer or its equipment distributor.  Under this arrangement the Lessee possesses and uses the asset and specifies the details of the asset to Vendor and negotiates applicable specifications, representations and warranties and other terms for the asset performance with the Vendor.  Either the Vendor or the Lessee then arranges for the Lessor to purchase the asset, and the Lessor leases the asset to Lessee.

Finance leases are usually capitalized for accounting purposes. 

When all is said and done there are essentially three agreements:

  1. The purchase agreement whereby the Lessor purchases the asset from the Vendor;
  2. The lease agreement whereby the Lessee leases the asset from the Lessor.  This is typically called a Finance Lease where the Lessor takes no responsibility for maintenance or performance of the asset and the Lessee is obligated to pay the Lessor the leasing payments notwithstanding the performance of the asset.
  3. While there is a pass through from Lessor to Lessee of certain warranties made by Vendor to Lessor in their purchase agreement under the provisions of the Uniform Commercial Code as adopted by most states, the Lessee should consider a separate agreement between the Lessee and the Vendor which provides for representations, warranties, service, maintenance and other terms and conditions which relate to the use and performance of the asset.

Such Finance Leases are useful for many applications, and the attorneys at RCO Law can assist in structuring asset leasing arrangements to meet your business and personal needs.

 

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