Additive Manufacturing Equipment Financing
Frequently Asked Questions
The most significant determining factor is the economic and technical longevity of the equipment in the marketplace. This is true for rapid prototyping and additive manufacturing equipment including SLA (stereolithography), SLS (selective laser sintering), DMLS (direct metal laser sintering), FDM (fused deposition modeling) and Polyjet (Objet) printers. Additionally, the higher the value of the equipment, the smaller the relative impact of lease initiation and administrative costs. Finally, the availability of alternative maintenance options and material suppliers helps lessees by reducing the vendor's pricing power.
A lease is a contract. By its terms, one party (the "lessor") gives another (the "lessee") the exclusive right to use and possess its property or equipment (the "leased property" or "leased equipment") for a specified period. The contract will require the lessee to make periodic payments (rentals) to the lessor for the use of the leased equipment.
The equipment. Leasing is usually 100% financing, with the leasing company paying the entire purchase price of the asset and leasing it to the lessee, usually with no down payment.
Taxes, maintenance and insurance are not included in a lease. Costs associated with on-sight building preparation are also not included. Startup costs including delivery and installation may be incentives offered by the vendor or lessor are typically not included.
The lessee has an absolute and unconditional obligation to pay rentals. Leases will contain contractual provisions requiring the lessee to pay all taxes, insurance premiums, maintenance costs and other expenses relating to the use of the equipment during the lease term (making the contract a "net lease"). Because the equipment is in the lessee's possession and control, the lease will provide that the lessee bears all risk of loss or damage.
The lessee must also inform the lessor of:
- Any change of control or ownership of the lessee's business,
- Any material change in the condition of the business,
- Any significant upgrade or addition, particularly if it is non-removable. and
- Any relocation of the equipment.
- Sales tax compliance
- Property tax compliance (in some jurisdictions)
- Billing and collection
- Vendor payment
It is no different than if you purchased the equipment because the lessor assigns the warranty to the lessee. The lessor disclaims and assigns its warranties and other rights against the manufacturer or vendor to the lessee. In addition, the lessee waives its right to assert any claims or defenses against the lessor for any problems, because the lessee chose the equipment.
It's low if:
- Your company has excellent credit
- The term of the lease is short
- The equipment retains market value through the term of the lease
- The lease is an operating or "FMV" (fair market value) lease
It's high if:
- Your company is a start-up (Can you say "Venture Capital?")
- You want a longer term than we do
- The equipment will probably be obsolete prior to the end of the lease
- Your company has weak credit due to a lack of earnings
There are two fundamental types:
An operating lease or fair market value (FMV) lease or off balance sheet lease wherein the lessor owns the equipment at the expiration of the lease. This lease is essentially a usage agreement. The lessee expenses lease payments and the lessor depreciates the equipment for tax purposes. The rates are lower because the lessor looks to the residual value of the equipment to come out whole.
A finance lease or capital lease wherein the lessee owns the equipment at the expiration of the lease. Other names for this style of lease are full payout and $1.00 out. The bottom line is that the lessee depreciates the equipment for tax purposes.
FASB (Financial Accounting Standards Board) is the governing body that defines the rules for GAAP (Generally Accepted Accounting Practices). Rule 13 defines an operating lease as a lease that meets all these four tests:
- The present value (PV) of rents is less than 90% of the equipment's value at the onset of the lease. The interest rate for the PV calculation is the lessee's incremental debt rate.
- The term of the lease is less than 75% of the useful life of the asset.
- There cannot be a bargain purchase option.
- Title does not pass to the lessee during the lease.
The reason Rule 13 may be important is that your accounting department may wish to treat the lease as an off balance sheet transaction. This means that with an operating lease, the lessee expenses the cost of the lease payments as opposed to depreciating the asset. In a rapidly changing technological environment, a lease can be used to compress the "economic" depreciation of assets into the term of the lease.
The IRS has strict guidelines for depreciation. The IRS wants to minimize your tax deductible expenses, i.e., depreciation.
In an operating lease, the payments are tax deductible provided the lease qualifies under FASB 13. So, leasing allows you to "compress" or "accelerate" depreciation into the term (length) of the lease.
In a finance lease, the IRS sets the "depreciation" at 5 years. This permits 70% of the cost to be depreciated in 36 months. Compare this to expensing 100% of the lease payments in 36 months if you choose an operating lease.
If the lease is an operating lease:
- Return the Equipment to the Lessor or
- Renew the lease at Fair Rental Value or
- Purchase the Equipment at Fair Market Value
If the lease is a finance lease:
- You own it for $X at lease expiration assuming all lease obligations have been met
If you sell your company during the course of the lease, you must buy out of that lease.
You probably know this already because that's the way it is in all kinds of financing situations. You can't transfer your lease obligations to somebody else any more than you can get out of an auto loan or lease by selling your car. You have to settle up with the bank.
The basics are spelled out in our lease. It says, among other things,
Except upon the express written consent of Lessor (NCP Leasing) , Lessee shall not: (i) enter into any transaction of merger or consolidation or any commitment with respect thereto; (ii) permit any substantial change in the ownership or control of the capital stock of Lessee; or (iii) change the form or organization of the business of Lessee.
It also says you may not sublease or assign the lease without our prior written consent.
2055 Reading Road, Suite 240
Cincinnati, Ohio 45202