STATED OPTION LEASES
A stated option lease allows a contractor to finance equipment without a large up-front payment. While there is a large payment at the end of a stated option lease, the customer's monthly payments are reasonable. This enables the customer to retain cash flow while using the equipment. At the end of the stated option lease, the customer can purchase the equipment for a guaranteed amount — thus eliminating the risk of making an unknown "fair market value" purchase. A company should consult a CPA or tax consultant to determine whether a option lease is in its best interest.
FAIR MARKET VALUE LEASES
Also called an Off Balance Sheet Lease, this financing option is linked to the covenant the contractor has with the bank, financial institution, or bonding company for an On Balance Sheet debt. It's similar to the stated option lease in that there can be a lump sum due on the equipment at the end of the lease. The amount due is based on the fair market value of the equipment at the end of the lease period, as appraised by the financial institution.
ACCELERATED PAYMENT PROGRAMS
An accelerated payment program is the quickest way for a contractor to build equity. Such a program increases the value of a trade allowance in the event of an early trade-in and is ideal for contractors who don't have a huge net worth. Of all the financing options, this has the lowest gross repayment. The customer will actually be paying less in interest costs. Since the contractor is paying the bulk of the equipment cost in the early years, the accelerated payment program is also one of the most attractive to lenders.
SKIP PAYMENT PROGRAMS
This option is particularly appropriate for contractors doing business in the northern part of the country, where weather shuts down production for all or part of the winter. The skip payment program is designed to match the customer's sales period. It is often the ideal choice for companies that have equity and are able to make higher payments during the nine months of the year that they are producing.
CONDITIONAL SALE CONTRACTS
As the most common financing option, the conditional sale contract requires an initial down payment and level payments spread out over several years. Often referred to as a straight purchase, this is the easiest repayment structure of all. With a conditional sale contract, a contractor usually establishes equity up front by making a significant down payment with no money due at the end of the contract.