This glossary covers the vocabulary you’ll encounter when financing equipment — from first application through lease-end. Some of these terms are technical, some are jargon that sounds technical but isn’t, and some are ordinary words the industry has given very specific contractual meaning: “hell or high water,” “fair market value,” “blanket lien.”
I’ve been working with this vocabulary for close to two decades, and one thing worth saying up front: the terms matter less than understanding what a document actually does to your cash flow, your tax position, and your balance sheet. Use this as a reference when you’re reading a proposal, signing a schedule, or trying to figure out whether a clause your lender flagged is a real concern. If a term here changes how you read a deal, it’s doing its job.
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A
- Accelerated Cost Recovery System (ACRS)
- A method of depreciating assets for tax purposes that allows a taxpayer to take larger deductions in the early years of an asset’s life and smaller deductions in the later years. Note: ACRS was replaced by MACRS (the Modified Accelerated Cost Recovery System) for most property placed in service after 1986. See MACRS.
- Add-on Interest
- A method of calculating interest in which the interest is added to the principal at the beginning of the loan, and the combined total is repaid in equal periodic payments. Because interest is not recalculated against a declining principal balance, the effective (APR) cost is higher than the stated add-on rate.
- Advance Rental Payments
- Payments made in advance by a lessee to a lessor for the use of property or equipment over a specified period. Often one or more payments are collected at lease signing and applied to the first and/or last periods of the lease term.
- Amortization
- The process of gradually paying off a loan through regular scheduled payments that cover both principal and interest, or, in accounting, the process of spreading out the cost of an intangible asset over its useful life. The amortization schedule shows how much of each payment goes to principal versus interest over the life of the loan.
- Annual Percentage Rate (APR)
- The annualized cost of a loan or credit line expressed as a percentage, including interest and certain required fees. APR allows side-by-side comparison of financing offers that would otherwise be hard to compare directly because of different fee structures.
- Application-Only Credit Review
- A credit evaluation process in which a lender underwrites a transaction based on the loan or lease application, commercial credit bureaus, and public records, without requiring additional financial statements. Commonly available for small-ticket equipment transactions (typically under $250,000, though the threshold varies by lender).
- ASC 842
- ASC 842 is the current FASB U.S. GAAP lease-accounting standard, formally titled “Leases (Topic 842).” It requires lessees to recognize a right-of-use asset and a corresponding lease liability on the balance sheet for most leases longer than 12 months — a substantial change from ASC 840, under which operating leases were generally kept off-balance-sheet. Effective for public companies in fiscal years beginning after December 15, 2018, and for most private companies in fiscal years beginning after December 15, 2021. Lease expense still flows through the income statement differently for “finance” versus “operating” leases, but the on-balance-sheet recognition is now the default for both.
- Asset-Based Financing
- A broader category of lending that uses business assets — accounts receivable, inventory, or equipment — as collateral for a revolving line of credit or term loan. Borrowing capacity is typically tied to a formula applied against the eligible collateral balance.
- Asset Finance
- Financing that allows a company to acquire a specific asset — equipment, vehicles, machinery — with the asset itself serving as the primary collateral for the financing. Covers both equipment loans and equipment leases.
- Assignee
- A person or entity to whom property, rights, or obligations are transferred. In equipment finance, a lessor may assign the income stream and security interest in a lease to a funding source; the assignee then holds those rights.
- Authorized Signature
- A signature by a person empowered to bind a business or entity to a contract. Lenders typically require documentation — a corporate resolution, operating agreement provision, or similar — verifying the signatory’s authority.
- Automated Clearing House (ACH)
- The electronic network used by U.S. financial institutions to process batched debits and credits between bank accounts. ACH is the standard mechanism for recurring lease and loan payments drafted directly from a business checking account.
B
- Bargain Purchase Option
- A provision of an equipment lease that allows the lessee to purchase the leased equipment at a predetermined price that is expected to be substantially lower than the asset’s fair market value at the end of the lease. The presence of a bargain purchase option is one of the tests that can cause a lease to be classified as a finance (capital) lease for accounting purposes.
- Basis Point
- A unit of measurement equal to one one-hundredth of a percent (0.01%). Used to describe interest-rate changes without ambiguity — a 25-basis-point move is 0.25%; 125 basis points is 1.25%.
- Blanket Lien
- A blanket lien is a security interest that covers substantially all of a borrower’s business assets — equipment, inventory, accounts receivable, and general intangibles — rather than a specific piece of collateral. Commonly found in bank lines of credit. A blanket lien can complicate later equipment financing because the existing lender’s interest may need to be released or subordinated before a new lender can take a clean security interest in the new equipment.
- Bonus Depreciation
- A federal tax provision (Internal Revenue Code §168(k)) that allows businesses to deduct a percentage of the cost of qualifying new or used equipment in the year it’s placed in service, in addition to — and on top of — any regular depreciation. The percentage has varied significantly by year under recent tax legislation. Current-year percentages change. Confirm the rate in effect for the tax year in question with current IRS guidance and a tax advisor.
- Buyout
- The amount a lessee must pay to terminate an equipment lease in advance of its scheduled expiration, or to purchase the equipment at lease-end. Early-termination buyouts are typically calculated to make the lessor whole — including recapture of tax benefits, any unpaid property taxes, and lost future income — and can be significantly higher than the remaining stream of scheduled payments.
C
- Capital Lease
- An equipment lease that, for accounting purposes, is treated as a purchase financed by debt. Under the prior accounting standard (ASC 840), a lease was classified as a capital lease if it met any one of four tests: ownership transfers at end of term; there’s a bargain purchase option; the lease term covers 75% or more of the asset’s estimated useful life; or the present value of the lease payments is 90% or more of the asset’s fair market value at inception. Under the current standard (ASC 842), what was called a “capital lease” is now termed a “finance lease.” The underlying concept is substantially the same — a lease that transfers risks and rewards of ownership is accounted for as a financed purchase — but the terminology has changed.
- Capped Fair Market Value Lease
- A fair-market-value lease that includes a predetermined ceiling on the purchase-option price at lease-end. Gives the lessee the flexibility of a true FMV lease while limiting the upside risk if the equipment holds its value unusually well.
- Captive Financing
- Financing provided by a company — usually a wholly-owned subsidiary — to support the sale of equipment manufactured or distributed by its parent. A common arrangement in industries where the manufacturer wants to control the customer’s financing experience.
- Cash Flow
- A measure of a business’s ability to meet its financial obligations, often approximated as EBITDA (earnings before interest, taxes, depreciation, and amortization). Net cash flow subtracts scheduled debt service and other non-cancelable financial commitments from EBITDA. Lenders use cash-flow coverage ratios to assess whether a business can comfortably carry new debt.
- Closed-Ended Lease
- A true tax lease in which the lessor assumes all residual-value risk. At lease-end, the lessee returns the equipment and has no further obligation — whether the equipment’s actual market value is higher or lower than the lessor originally estimated. Distinct from an open-end lease, where the lessee typically bears some or all of the residual risk.
- Commitment Letter
- A written offer from a lessor or lender outlining the principal terms and conditions of an approved financing — rate, term, payment amount, required documentation, any outstanding conditions. Typically issued after credit approval and before final documentation.
- Conditional Sale
- A financing structure in which the buyer takes possession and use of the asset but the seller (or lender) retains title until the final payment is made. For tax purposes, the buyer is generally treated as the economic owner of the asset and claims the related depreciation.
- Continuation Statement (UCC-3 Continuation)
- A filing that extends the effectiveness of a UCC-1 financing statement beyond its standard five-year term. Under UCC §9-515, a continuation statement may be filed only within the six months before the original filing would otherwise lapse; filed on time, it keeps the secured party’s perfected status in place for another five years. If the window is missed, the security interest becomes unperfected against competing creditors — a practical concern on long-lived equipment or facilities that outlast the initial filing period.
- Corporate Resolution / Incumbency Certificate
- A document, typically signed by a corporation’s secretary or another officer, attesting that the individual signing a lease or loan agreement on the company’s behalf is duly authorized to do so. Lenders require this to ensure the contract is enforceable against the entity.
- Coterminous
- Describes two or more equipment leases structured so they terminate on the same date. A coterminous addendum is used to add equipment to an existing lease and adjust the payments; both the original schedule and the addendum end on the original lease’s expiration date.
- Credit Rating
- A score or assessment summarizing the creditworthiness of a business or individual, used by lenders to predict the likelihood that a borrower will repay as agreed. Credit ratings are produced by credit bureaus (for business credit) and consumer reporting agencies (for personal credit).
- Credit Report
- A detailed financial history provided by a credit-reporting agency. Business credit reports (from agencies such as Dun & Bradstreet, Experian Business, and Equifax Business) typically include trade-payment history, banking relationships, public records such as liens and judgments, and basic business information. Personal credit reports cover consumer borrowing history.
- Credit Scoring
- A statistical model used by lenders to evaluate credit risk, typically by assigning numeric weights to factors such as payment history, existing credit utilization, business age, industry, and size. Different lenders use different models; the same applicant can receive different scores from different scoring systems.
- Cross-Corporate Guarantee
- A guarantee by one corporation of the obligations of another corporation under common ownership — for example, a parent guaranteeing a subsidiary’s lease, or one sister company guaranteeing another. Used when a lender wants recourse beyond the immediate borrower.
- Cure Period
- A contractual window during which a lessee or borrower can fix (“cure”) a default — typically a missed payment or a broken covenant — before the lender can exercise remedies such as acceleration, repossession, or termination. Cure periods vary by default type: monetary defaults (late payments) often carry short cure windows (5–10 days after notice); non-monetary defaults (lapsed insurance, covenant violations) sometimes carry longer windows. Cure periods are not automatic — the lease or loan document controls whether they apply at all.
- Current Ratio
- A liquidity metric calculated by dividing current assets by current liabilities. A current ratio above 1.0 indicates that a business’s short-term assets exceed its short-term obligations; lenders often look at the ratio as a quick measure of near-term financial health.
D
- Dealer
- A seller of equipment to end-users. Equipment dealers frequently offer financing as part of a sale, either through their own captive finance operation or in partnership with a third-party equipment finance company.
- Dealer / Vendor Referral Agreement
- A one- or two-page agreement between an equipment vendor and a finance company, governing the vendor’s referral of customers for financing. Typically obligates the vendor to pass clean title to the lessor upon delivery, acceptance by the lessee, and funding.
- Default
- A failure by the lessee or borrower to perform an obligation under the lease or loan — most commonly non-payment, but can also include insurance lapses, failure to maintain equipment, material misrepresentation, or bankruptcy. After default, the lender may accelerate the obligation, seize the collateral, and pursue money damages, subject to applicable law and notice requirements.
- Default Rate
- A penalty interest rate that applies to past-due amounts once the lessee or borrower is in default — typically the contract rate plus a fixed spread (for example, contract rate + 5%), or a flat statutory maximum. The default rate accrues on unpaid balances until the default is cured or the obligation is fully paid. Separate from late-payment fees, which are a flat charge applied to each missed installment.
- Delivery and Acceptance Certificate
- A document (sometimes verbal confirmation) executed by the lessee confirming that the equipment has been delivered, conforms to the lease specifications, and is operating as expected. Generally the final document before the lessor funds the transaction by paying the vendor.
- Depreciation
- A tax and accounting method for allocating the cost of a tangible asset over its useful life, reflecting wear, tear, and obsolescence. The owner of the equipment generally claims depreciation; whether lessor or lessee owns the equipment for tax purposes depends on how the lease is structured (see True Lease, Finance Lease).
- Direct Financing Lease (Direct Lease)
- A non-leveraged lease written by an equipment lessor that isn’t the manufacturer or dealer, structured to meet the accounting criteria of a finance (capital) lease. The lessor records its receivable and unearned income; the lessee records the right-of-use asset and lease liability.
- Discount Rate
- The interest rate used to convert a stream of future cash flows to a present-value equivalent. Higher discount rates reduce present values more sharply; discount-rate selection has a material effect on lease-versus-buy analyses.
- Documentation
- The set of executed documents governing a lease or loan — the master agreement, schedules, UCC filings, personal guarantees, and related exhibits. Documentation requirements vary by transaction type, ticket size, and lender.
- Documentation Fee
- A fee charged by the lessor or lender to cover the cost of processing a transaction — generating documents, running searches, filing UCC financing statements with the Secretary of State or county clerk, and administering the initial setup. Typically a flat dollar amount rather than a percentage.
- Dollar Buyout ($1 Purchase Option)
- An end-of-lease purchase option for a nominal amount, typically $1. Functionally, a lease with a $1 buyout is an installment purchase — the lessee is expected to take title at lease-end. For tax purposes, such leases are generally treated as conditional sales, with the lessee claiming depreciation.
- Down Payment
- Cash paid by the buyer at the inception of a loan, reducing the amount financed. Equipment leases typically do not require down payments (though advance rental payments are common); equipment loans and EFAs often do, especially for newer or weaker-credit borrowers.
- Dun & Bradstreet (D&B)
- A commercial credit-reporting agency that compiles and sells business credit information — payment history, public filings, financial trends, and predictive scores. Widely used by equipment lessors and lenders in underwriting.
E
- Early Purchase Option (EPO)
- A contractual option allowing the lessee to purchase the equipment at a defined point during the lease term (often mid-term) for a predetermined amount. The EPO price is typically set to approximate the lessor’s economic payoff, allowing the lessee to exit the lease early without surprise.
- EBITDA
- Earnings Before Interest, Taxes, Depreciation, and Amortization. A proxy for operating cash generation before capital-structure and tax effects. Commonly used by lenders to evaluate a borrower’s capacity to service debt.
- Economic Life / Useful Life
- The period during which an asset is expected to be usable and productive in the hands of a typical user. Economic life is a key input to lease classification tests and to depreciation schedules.
- Effective Lease Rate
- The implicit rate of a lease transaction to the lessee, reflecting the timing and tax treatment of the cash flows. For tax leases in particular, the effective rate can be meaningfully lower than a comparable loan rate because of the deductibility of lease payments and other timing effects.
- Electronic Funds Transfer (EFT)
- The electronic movement of funds between accounts. In equipment finance, EFT typically refers either to funding the vendor at transaction close (usually by wire) or to the recurring ACH debit of lease payments from the lessee’s account.
- Equipment
- In a lease context, the specific asset or assets covered by a lease agreement and identified on the lease schedule. Many lessors allow a limited percentage of related “soft costs” — installation, freight, training, software — to be included within the equipment financing.
- Equipment Finance Agreement (EFA)
- An Equipment Finance Agreement (EFA) is a loan agreement structured for equipment acquisition, with the borrower taking immediate ownership of the asset and the lender holding a security interest. EFAs share many features with $1-buyout leases but are documented as loans — often used for titled vehicles or when the borrower specifically wants to own the equipment from day one.
- Equipment Schedule
- The schedule attached to a lease or loan that identifies the specific assets being financed — typically by make, model, serial number, and location. The schedule is the definitive record in the event of a dispute over which assets are covered.
- Equity Participant
- In a leveraged lease, the party that contributes the equity portion of the equipment cost and is the beneficial owner of the leased asset. Can be an owner trustee, trustor, or guarantor depending on the structure.
- Estimated Residual Value
- The lessor’s projected value of the equipment at the end of the lease term, typically stated in current dollars without adjustment for inflation. Estimated residual is a key pricing input for tax-oriented leases — the higher the residual the lessor can reasonably estimate, the lower the required rental payments can be.
- Estimated Useful Life
- The period over which an asset is expected to be useful in a typical business setting. Used in both accounting (for depreciation schedules) and in lease classification tests that compare the lease term to the asset’s useful life.
- Exemption Certificate
- A document that exempts a purchase from sales or use tax. In equipment finance, an exemption certificate may be used by a lessor buying equipment for resale to a lessee, or by a lessee whose own status (e.g., non-profit, governmental) exempts it from sales tax.
F
- Fair Market Renewal Value
- The rental rate a lessee would pay to continue using the equipment after the initial lease term ends, set at the then-current market rental rate. Used when a lease allows the lessee to extend rather than purchase or return.
- Fair Market Value (FMV)
- The price at which a willing, informed buyer and a willing, informed seller would exchange the equipment in an arm’s-length transaction. At lease-end, FMV is typically determined by reference to recent comparable sales, adjusted for condition, de-installation costs, and expected resale expenses.
- Fair Market Value Purchase Option
- A provision in a true lease that allows the lessee to buy the equipment at lease-end for its then-current fair market value, generally determined by appraisal or negotiation between lessor and lessee. Distinguishes a true tax lease from a finance lease.
- Finance Lease
- A finance lease is a lease that transfers substantially all the risks and rewards of ownership to the lessee — accounted for as a financed purchase rather than a rental. It is the current ASC 842 accounting term for what was previously called a capital lease. The label is also used colloquially to describe $1-buyout or bargain-purchase-option leases, which are treated the same way for accounting purposes. For the specific non-cancelable lease structure funded by a single equity investor, see Single-Investor Lease.
- Financial Statements
- A business’s formal accounting reports — typically the income statement (profit & loss), balance sheet, and statement of cash flows. Statements may be company-prepared (compiled), reviewed by an outside CPA, or fully audited; lenders weight these levels of reliability differently.
- Financing Statement (UCC-1)
- The standardized form filed with a Secretary of State or county clerk to perfect a lender’s security interest in collateral under UCC Article 9. Once filed, the financing statement puts the world on notice of the lender’s claim against the identified collateral. Financing statements generally last five years before needing a continuation filing.
- First-Amendment Lease
- A hybrid lease structure that gives the lessee a purchase option at defined points, with a requirement to renew if the purchase option isn’t exercised. The option price is typically an approximation of fair market value (with a floor to protect the lessor’s residual). If the lessee neither buys nor renews, the lease continues under specified terms until the lessee eventually returns the equipment or purchases it.
- Fixed Interest Rate
- An interest rate that does not change over the life of a loan. Provides payment certainty to the borrower, at the cost of not benefiting if market rates decline.
- Fixed Purchase Option
- A lease-end purchase option at a predetermined, fixed amount — typically stated as a percentage of the original equipment cost (10% PUT options are common). Unlike a FMV option, the price doesn’t move with market conditions.
- Floating Rental Rate
- A lease rental rate that adjusts during the lease term, typically indexed to a benchmark such as SOFR, the prime rate, or a Treasury yield. Less common in small-ticket equipment leases than in larger commercial transactions.
- Full-Payout Lease
- A lease in which the scheduled rental payments cover the lessor’s cost of the asset plus required return — without relying on the equipment’s residual value for the lessor to break even. Distinguishes from tax-oriented leases where residual value is a material part of the lessor’s economics.
- Funding
- The point at which a lender or lessor actually disburses money under a completed transaction — typically by wiring the invoice amount to the equipment vendor, directly or through the lessee. “Funded” means documents are signed, credit is approved, any remaining stips have been cleared, and cash has moved. “Funding delay” is the industry shorthand for the gap between docs and money, which is almost always driven by outstanding stipulations rather than by the lender’s operational throughput.
G
- Guarantee (Personal / Corporate / Other)
- A promise by a third party to perform the lessee’s or borrower’s obligations if the primary obligor fails to do so. Personal guarantees from business owners are common in small-ticket equipment finance, particularly for closely-held companies. Corporate guarantees from parent companies or affiliates are used when one entity’s credit supports another’s obligation.
- Guarantor
- The person or entity providing the guarantee. A guarantor who has signed a full personal guarantee is personally liable for the full obligation if the borrower defaults, up to any contractual limits.
- Guideline Lease
- A lease written to conform with IRS guidelines so that the lessor will be recognized as the tax owner and entitled to the associated depreciation and related benefits. The guidelines cover structural features such as minimum and maximum lease terms, residual values, and the presence or absence of purchase options.
H
- Hell-or-High-Water Clause
- A lease provision requiring the lessee to make all scheduled payments regardless of any other circumstance — equipment malfunction, vendor non-performance, casualty loss, dispute with the vendor, or changes in the lessee’s business. The clause is what makes an equipment lease financeable in the secondary market; it also means the lessee’s remedies for equipment problems run against the vendor, not the lessor. Among the most important clauses in any equipment lease.
I
- Incremental Borrowing Rate (IBR)
- The rate a lessee would have paid to borrow the funds necessary to purchase the asset outright, over a similar term and against similar collateral. Under ASC 842, lessees typically use their IBR as the discount rate for measuring lease liabilities when the rate implicit in the lease isn’t readily determinable.
- Indemnity Clause
- A lease or loan provision in which the lessee agrees to make the lessor whole for specified losses — most commonly loss of expected tax benefits caused by the lessee’s actions or misrepresentations. Broader indemnities may also cover third-party claims arising from the use of the equipment.
- Indenture of Trust (Indenture)
- In a leveraged lease, the agreement between the owner trustee and an indenture trustee representing the debt investors. The owner trustee assigns the lease payments and grants a security interest in the equipment to secure the debt. Functionally similar to a security agreement or mortgage.
- Insurance
- Lessors and lenders typically require the lessee or borrower to maintain physical-damage insurance on the equipment (naming the lessor as loss payee) and liability insurance covering third-party claims arising from its operation (naming the lessor as additional insured). Coverage requirements, limits, and deductibles vary by lessor, equipment type, and transaction size.
- Intercreditor Agreement
- A contract among two or more secured creditors of the same borrower that sets the priority, rights, and remedies each will have with respect to shared or overlapping collateral. In equipment finance, an intercreditor is most often needed when a specialty equipment lender wants a first-priority PMSI in specific equipment while the borrower’s bank holds a blanket lien across all business assets. The agreement commonly carves out the equipment lender’s collateral from the bank’s lien, coordinates default notices, and governs access to the collateral on repossession.
- Interest Rate
- The price of borrowing money, expressed as a percentage of the amount borrowed, typically stated on an annual basis. May be fixed or variable.
- Interim Rent
- A pro-rated daily rental charged for the period between equipment delivery/acceptance and the first regular invoice cycle. Billed on the first regular invoice, interim rent covers the lessee’s use of the equipment during the partial month before the lease’s payment schedule begins.
- Investment-Grade Credit
- A credit rating high enough to be considered low-risk by the major rating agencies (BBB− or higher from S&P, Baa3 or higher from Moody’s). Investment-grade lessees often qualify for narrower pricing and lighter documentation.
J
- Joint and Several Liability
- A legal arrangement in which each of two or more obligors is individually responsible for the entire obligation, not just a pro-rata share. Common in partnerships and in multiple-guarantor structures: if the primary obligor defaults and one guarantor can pay the full amount, the lender can collect the entire balance from that guarantor and leave the other guarantors to sort out contribution among themselves.
- Judgment Creditor
- A creditor that has obtained a court judgment against a debtor. Post-judgment, the creditor has expanded collection remedies under state law — garnishing bank accounts, placing liens on real property, pursuing post-judgment discovery — that aren’t available before judgment is entered.
L
- Lease
- A contract under which the owner of an asset (the lessor) gives another party (the lessee) the right to use the asset for a specified period in exchange for periodic payments. The lessor retains legal title; the lessee has possession and use.
- Lease Agreement
- The principal contract governing a lease transaction — whether a stand-alone agreement for a single lease or a master lease that will govern multiple future schedules. Covers payment terms, use and return obligations, tax treatment, default and remedies, and related provisions.
- Lease Commencement
- The date on which the lease term officially begins, typically the date the lessee accepts delivery of the equipment. Used to calculate the lease’s scheduled expiration.
- Lease Proposal
- A written summary of proposed lease terms — equipment, cost, term, payment, deposits, purchase options — usually signed by both parties and subject to credit approval. Serves as the term sheet before full documentation.
- Lease-Purchase Agreement
- A full-payout net lease with a term that approximates the equipment’s useful life and typically includes a bargain purchase option (often $1). Treated as a finance (capital) lease for accounting and as a conditional sale for tax purposes. Also called a “dollar-buyout” or “buck-out” lease.
- Lease Rate (Rental Payment)
- The periodic amount the lessee pays the lessor for use of the equipment — typically expressed as a dollar amount per month or per quarter.
- Lease Rate Factor
- A decimal factor multiplied by the equipment cost to determine the periodic lease payment. Useful for quick quotes: a $50,000 piece of equipment at a 0.0210 monthly lease rate factor produces a $1,050 monthly payment.
- Lease Schedule
- A schedule under a master lease agreement that specifies the equipment, payment stream, term, and any schedule-specific terms. A master lease can have many schedules over time, each treated as a separate rental obligation.
- Leasing Line
- A pre-approved maximum amount of lease financing a lessor will commit to a specific lessee over a defined commitment period. The lessee can draw against the line in multiple schedules as equipment acquisition needs arise, subject to the line’s terms.
- Lessee
- The lessee is the party to a lease that uses the equipment and is obligated to make the rental payments.
- Lessor
- The lessor is the party to a lease that holds legal title to the equipment (in a true tax lease) and grants the lessee the right to use it in exchange for rental payments.
- Level Payments
- Equal periodic payments over the term of a lease or loan — the most common payment structure. Contrasts with step-up, step-down, and skip-payment structures.
- Leveraged Lease
- A tax-oriented lease in which the lessor contributes a portion of the equipment cost as equity (commonly 20–40%) and a third-party lender provides the balance on a non-recourse basis secured by the equipment and the lease. The lessor, as equity participant, claims the tax benefits of ownership.
M
- MACRS (Modified Accelerated Cost Recovery System)
- The U.S. depreciation system governing most tangible business property placed in service after 1986, detailed in IRS Publication 946. MACRS assigns each class of property (e.g., computers, office furniture, machinery, vehicles) a recovery period and depreciation method, producing faster write-offs than straight-line depreciation would. MACRS is the current successor to ACRS.
- Master Lease
- A lease agreement that establishes the terms and conditions under which a lessee will lease equipment from the lessor over time, but doesn’t itself specify the equipment or payments. Specific equipment is then leased under individual schedules attached to the master lease.
- Middle Market (Middle Ticket)
- The segment of equipment finance roughly covering transactions between $250,000 and $5 million (sometimes defined more narrowly as $100,000 to $3 million). Typically financed by single-investor leases and loans rather than leveraged structures.
- Municipal Lease
- A lease entered into by a state or local governmental entity — a city, county, school district, municipal authority, or similar. Typically structured with a non-appropriation clause (allowing the governmental lessee to terminate if its legislative body doesn’t appropriate funds) and may qualify for tax-exempt interest treatment.
N
- Net Lease
- A lease in which the lessee is separately responsible for equipment operating costs — maintenance, insurance, personal property taxes, and related expenses — in addition to the rental payments. The vast majority of small- and middle-ticket equipment leases are net leases.
- Non-Appropriation Clause
- A contractual provision, standard in municipal and governmental equipment leases, that allows the lessee to terminate the lease at the end of its current fiscal period if the governing body does not appropriate funds for continued payments. Because U.S. state and local governments generally cannot bind a future legislature to make payments, a non-appropriation clause is typically required for municipal lease financing to be a permissible obligation rather than prohibited long-term debt. The clause must usually be exercised in good faith and with notice to the lessor; if invoked, the equipment is returned.
O
- Off-Balance-Sheet Financing
- A financing arrangement that, under the applicable accounting standard, is not recognized on the balance sheet of the user of the asset. Historically, operating leases under ASC 840 were the classic off-balance-sheet arrangement — the lessee expensed the rent as it was paid and disclosed the future lease obligations only in footnotes. Under ASC 842, operating leases are now recognized on the lessee’s balance sheet as a right-of-use asset and a lease liability. For most lessees today, “off-balance-sheet” treatment of ordinary equipment leases is no longer available.
- Open-End Lease
- A lease in which the lessee guarantees the lessor a minimum realization from the sale of the equipment at lease-end. If the equipment sells for less than the guaranteed amount, the lessee pays the shortfall; if it sells for more, the surplus is typically refunded to the lessee. Common in vehicle leasing (see TRAC Lease).
- Operating Lease
- An operating lease is a lease that does not transfer substantially all the risks and rewards of ownership to the lessee. Under ASC 842, the lessee recognizes lease expense on a straight-line basis in the income statement. Under ASC 842, the lessee still recognizes a right-of-use asset and lease liability on the balance sheet for an operating lease — the main difference from a finance lease is how the expense hits the income statement, not whether the lease appears on the balance sheet. The pre-ASC-842 rule that “operating leases stay off the balance sheet” is outdated.
P
- Payment in Advance / Payment in Arrears
- “In advance” means the periodic payment is due at the beginning of the period it covers; “in arrears” means it’s due at the end. Most small-ticket equipment leases are billed in advance, while most commercial loans are paid in arrears. The difference affects the effective rate.
- Personal Guarantee
- A personal guarantee is a written commitment in which a business owner (or other individual) agrees to satisfy the business’s obligations if the business fails to do so. Personal guarantees are common in small-business equipment finance and carry real consequences: the lender can pursue the guarantor’s personal assets if the business defaults.
- Personal Property Tax
- An annual tax assessed by some states and counties on the value of business equipment. Under most equipment leases, the lessor receives the property-tax bill and passes the charge through to the lessee on a separate invoice or rental-bill line item.
- Present Value
- The current-dollar value of a future payment or stream of payments, calculated by discounting the future cash flows at a specified rate. Present value is the foundation of lease-versus-buy analysis and of the accounting tests used to classify leases.
- Purchase-Money Security Interest (PMSI)
- A security interest taken by a seller or lender in goods whose purchase the seller or lender financed — in equipment finance, the lien the lender takes in the specific equipment it funded. Under UCC Article 9, a properly perfected PMSI in equipment generally has priority over earlier-filed conflicting security interests in the same collateral (including a bank’s blanket lien), provided the PMSI is perfected before, or within 20 days after, the debtor receives the equipment. The PMSI rule is what allows a business with a blanket bank lien across all assets to still finance new equipment with a specialty lender taking first priority in the new asset.
- Purchase Option
- A lease provision allowing the lessee to buy the equipment at lease-end. The price may be fixed (dollar buyout, 10% PUT), set by the market (fair market value), or constrained by a ceiling (capped FMV).
- Purchase Upon Termination (PUT) Option
- An agreement obligating the lessee to purchase the equipment at lease-end for a predetermined amount. Distinct from a standard purchase option: with a PUT, the lessee must buy; with an option, the lessee may buy. The predetermined amount is commonly 10% of original cost (a “10% PUT”).
Q
- Quarterly Payment Structure
- A lease or loan payment schedule in which payments are due quarterly rather than monthly. Often used by seasonal or project-driven businesses whose cash flow aligns better with a quarterly rhythm than a monthly one.
- Quiet Enjoyment
- A standard lease provision promising the lessee that, so long as it is not in default, the lessor will not interfere with the lessee’s use and possession of the equipment. A practical concern when a lease is assigned to a third-party funder: the assignment typically preserves the lessee’s quiet-enjoyment rights against the assignee as long as the lessee performs.
R
- Recourse Agreement
- An agreement between a lessor and an equipment vendor under which the vendor agrees to repurchase the lessor’s interest in a lease (or portion of it) upon the lessee’s default. Used when the vendor’s credit enhancement is needed to get the lease approved. Full recourse, limited recourse, and pool-based recourse are all used in the market.
- Renewal Option
- A provision allowing the lessee to extend the lease beyond its original term, typically at a renewal rental rate specified in the lease or determined at renewal. Distinct from a purchase option, which ends the lease by transferring ownership.
- Residual Value
- Residual value is the value of leased equipment at the end of the lease term, either actual (measured at lease-end) or estimated (projected at inception for pricing purposes). The lessor’s expected residual materially affects the lease’s pricing: higher expected residuals allow lower rental payments.
- Right-of-Use (ROU) Asset
- Under ASC 842, the lessee’s recognized right to use the leased equipment over the lease term, recorded on the balance sheet. The ROU asset is amortized over the lease term (or the asset’s useful life, in some finance-lease cases); the corresponding liability is reduced as payments are made.
S
- Sale-Leaseback
- A transaction in which a business sells equipment it already owns to a finance company and simultaneously leases it back, retaining continuous use of the equipment while converting its equity in the equipment into cash. Generally used when a business needs working capital. Tax effects can include income-tax recognition on the gain (if any) between sale price and book value, and sales or use tax on the sale side, depending on state rules.
- Schedule
- A document incorporated by reference into a master lease or master loan agreement, describing specific equipment being financed under that master and any schedule-specific terms (payment, term, deposits, purchase options).
- Section 179
- A federal tax provision (Internal Revenue Code §179) that allows businesses to immediately deduct the cost of qualifying equipment and software placed in service during the year, subject to an annual dollar limit and a phase-out threshold that reduces the deduction once total qualifying purchases exceed a specified amount. Section 179 is designed to favor small and mid-sized businesses. Annual dollar limits and phase-out thresholds change and are periodically updated by Congress. Confirm the current year’s limits via IRS guidance or a tax advisor. Crest Capital maintains an updated Section 179 and bonus depreciation page reflecting current limits.
- Security Agreement
- The agreement between a debtor and a secured party that creates or provides for a security interest in specific collateral. Under UCC Article 9, a security agreement is typically the contract that grants the lender its lien (with the UCC-1 financing statement perfecting that interest in the public record). In equipment finance, the security agreement is most often embedded inside the equipment finance agreement or loan document itself rather than filed as a separate paper, and it identifies the collateral, the obligations secured, and the default and remedies provisions.
- Security Deposit
- Cash held by the lessor as additional collateral, typically one to three lease payments. Applied to any final obligation at lease-end or refunded if the lessee performs all obligations. Unlike advance rent, a deposit is not earned by the lessor until there’s a shortfall.
- Security Interest
- An interest in personal property or fixtures that secures payment or performance of an obligation — defined under UCC Article 1 and governed, for most equipment-finance collateral, by Article 9. The lender with a security interest has contractual and statutory rights against the specific collateral if the borrower defaults, including repossession and sale. “Perfection” — usually by filing a UCC-1 — is what makes that interest enforceable against third parties (other lenders, bankruptcy trustees).
- Single-Investor Lease
- A tax-oriented lease in which a single lessor funds the entire equipment cost (no leveraged debt) and earns its return through a combination of rental payments, depreciation tax benefits, and residual value. Typically non-cancelable, with the lessee obligated to pay total rentals covering the lessor’s cost plus required return, and responsible for taxes, insurance, and maintenance during the term. Rentals are typically lower than on a non-tax finance lease because the lessor is recovering part of its economics through tax benefits and residual.
- Skip-Payment Lease
- A lease payment structure that schedules payments only during certain defined periods of the year, skipping others. Used by seasonal businesses (agricultural equipment, landscaping, tourism) whose revenue concentrates in particular months.
- Small-Ticket
- Equipment-finance transactions under approximately $250,000 (the threshold varies by lender and year), often underwritten on an application-only basis. The largest and most automated segment of the equipment finance industry by transaction count.
- SOFR (Secured Overnight Financing Rate)
- The Federal Reserve Bank of New York’s benchmark interest rate for overnight borrowing collateralized by U.S. Treasury securities, published each business day. SOFR has largely replaced LIBOR as the reference rate in U.S. commercial-finance documents since the formal LIBOR wind-down. Variable-rate equipment loans and leases that are not tied to the prime rate typically reference a SOFR index — usually a term SOFR (e.g., 1-month or 3-month) plus a spread — for the floating portion of the rate.
- Soft Costs
- Non-hardware components included in an equipment financing — freight, installation, labor, training, software, extended warranties. Lessors typically cap the percentage of soft costs they’ll finance (often 20–25%, though it varies) because soft costs are difficult or impossible to recover on repossession.
- Step-Up / Step-Down Lease
- A lease in which scheduled payments increase (step-up) or decrease (step-down) at predetermined intervals. Step-ups are used when a business expects revenue from the equipment to ramp over the early months; step-downs can match declining usage or anticipated revenue.
- Stipulated Loss Value (SLV)
- A schedule attached to a lease specifying the amount the lessee must pay the lessor if the equipment is lost, stolen, or destroyed at various points during the lease term. SLV amounts are designed to make the lessor whole for its remaining investment and the residual value it would have realized.
- Stipulations / Stips
- Conditions a lessee or borrower must satisfy before the lender will fund the transaction — for example, evidence of insurance, a signed delivery-and-acceptance certificate, bank statements, an updated financial statement, a vendor invoice, or a UCC search clearing prior filings. “Clearing stips” is what the lender’s funding desk is doing between credit approval and wire. The most common cause of a delayed funding is not the lender — it’s an outstanding stip waiting on the lessee, the vendor, or an insurance broker.
- Structuring
- The process of combining the components of a financing — term, payment stream, collateral, guarantees, deposits, purchase options — to arrive at a transaction that meets the lessee’s needs and the lessor’s credit and return requirements.
- Subordination Agreement
- A contract in which one creditor agrees that its claim against the borrower — or its security interest in specific collateral — will rank behind another creditor’s claim. In equipment finance, the document most commonly arises when an existing bank lender agrees to subordinate its blanket lien on specific equipment to a new equipment lender’s first-priority interest, so the equipment finance transaction can close cleanly. Often executed as part of, or alongside, an intercreditor agreement.
- Synthetic Lease
- A financing historically structured as a lease for accounting purposes but as a loan for tax purposes, allowing a corporation to keep the asset off its balance sheet while still claiming depreciation. Under ASC 842, the accounting benefit of a traditional synthetic lease is largely eliminated, because the lessee recognizes a right-of-use asset and liability on the balance sheet for nearly all leases over 12 months. Synthetic leases still appear in specific contexts but are much less common than they were before 2019.
T
- Taxes (Sales / Use / Personal Property)
- The principal taxes that affect equipment finance. Sales tax may apply at the time of equipment purchase. Use tax may apply when equipment is moved across state lines or used in a state that didn’t charge sales tax. Personal property taxes are annual assessments on business equipment in some jurisdictions. Lease documents typically require the lessee to pay or reimburse the lessor for all applicable taxes.
- Tax-Exempt Entity
- For federal income-tax purposes, these include:
- Any federal, state, or local government (including agencies and instrumentalities).
- Any organization exempt from federal income tax under Internal Revenue Code §501 — non-profit charitable organizations, educational institutions, and related entities.
- Most foreign persons or entities whose gross income is not effectively connected with a U.S. trade or business.
- Tax Lease (True Lease)
- A lease structured so that the lessor is treated as the tax owner of the equipment under applicable IRS rules. The lessor claims depreciation and any other benefits of ownership; the lessee deducts rental payments as ordinary business expenses. Distinct from a non-tax lease (finance lease, dollar buyout), where the lessee is treated as the economic owner for tax purposes.
- Term
- The length of time a lease or loan remains in effect, along with the rules governing the agreement — cancellation, renewal, default, and other provisions.
- Ticket Size
- The dollar amount of an equipment finance transaction. The industry roughly segments into small-ticket (under approximately $250,000), middle-ticket ($250,000 to $5 million), and large-ticket (over $5 million), though the boundaries shift by lender and over time.
- TRAC Lease
- A Terminal Rental Adjustment Clause lease, used exclusively for titled motor vehicles. The TRAC adjusts the end-of-term value based on the actual resale proceeds compared to the originally contracted residual. Structured to qualify as a true lease for federal tax purposes despite the lessee’s residual-value risk.
- True Lease
- A true lease is a lease that qualifies under IRS rules as a lease for tax purposes — with the lessor treated as the owner of the equipment and the lessee deducting rental payments as ordinary business expenses. Functionally synonymous with “tax lease.” The IRS distinguishes a true lease from a conditional sale using the factors set out in Revenue Ruling 55-540 and related guidance.
- Trustee
- In a leveraged lease, a financial institution that holds title to (or a security interest in) the leased property for the benefit of the lessor’s equity investors (owner trustee) or the lenders who funded the debt portion (indenture trustee). A leveraged lease commonly has both.
U
- UCC-1 Financing Statement
- The document filed with a Secretary of State (or, for some collateral types, a county clerk) to perfect a security interest in personal property under UCC Article 9. A UCC-1 identifies the debtor, the secured party, and the collateral, and becomes a public record that puts other creditors on notice. Typically effective for five years before requiring a continuation.
- UCC-3 Termination Statement
- A filing that releases a UCC-1 financing statement — removing the secured party’s public-record claim against the debtor’s collateral. Typically filed by the secured party after the underlying obligation is paid in full (or by the debtor with the secured party’s authorization). UCC-3 forms are also used for continuations and for amendments (name changes, collateral changes, assignments); the form itself is multi-purpose, with the filer selecting which action it represents.
- Uniform Commercial Code (UCC)
- A model body of commercial law adopted in substantially uniform form by every U.S. state. Article 9 of the UCC governs secured transactions — the creation, perfection, priority, and enforcement of security interests in personal property, including equipment used as collateral in financing deals.
- Upgrade
- A trade-in of leased or financed equipment, mid-term, for a newer or more advanced model. Upgrades usually involve terminating or restructuring the existing schedule and originating a new one covering the replacement equipment.
- Useful Life
- The period during which an asset is expected to be usable and productive — sometimes called economic life. Used in lease classification tests and in depreciation calculations. Under historical operating-lease rules, the property had to retain at least 25% of its original useful life at lease-end to qualify; ASC 842 handles the lease-versus-purchase decision through a different set of classification tests.
V
- Variable Interest Rate
- An interest rate that fluctuates over the life of a loan, typically tied to a benchmark rate such as SOFR or the prime rate plus a fixed spread. Payments move up or down as the benchmark moves.
- Vendor Leasing
- A working relationship between an equipment finance company and an equipment vendor, in which the finance company provides financing to the vendor’s customers. Often includes credit-pre-qualification, co-branded marketing, and dedicated sales support. Also called vendor finance, private-label finance, or vendor programs.
W
- Warranty
- A manufacturer’s or vendor’s promise regarding the quality or performance of equipment over a defined period. In most equipment leases, the lessor disclaims all warranties (because the lessor didn’t manufacture the equipment) and assigns to the lessee its rights under any manufacturer’s warranty. This is what makes the hell-or-high-water clause workable: equipment problems are the vendor’s issue, not the lessor’s.
- Working Capital
- Current assets minus current liabilities — a measure of a business’s short-term liquidity and its ability to fund day-to-day operations. Equipment financing is often chosen specifically to preserve working capital: rather than spending cash on a major asset, the business matches the cost to the equipment’s useful life and keeps liquidity available for operations.
Y
- Yield
- The lessor’s effective rate of return on a lease transaction, typically calculated as the internal rate of return on the cash flows the lessor receives (payments, tax benefits, and end-of-term proceeds) relative to the cash it commits at inception.
Primary sources
- Equipment Leasing and Finance Association (ELFA) The principal U.S. industry association for equipment finance companies. Publishes glossaries, industry data, and guidance on terminology and practice.
- FASB — Leases (Topic 842) The Financial Accounting Standards Board’s public-facing page for the current U.S. GAAP lease-accounting standard. Defines finance vs. operating lease classification, lessee recognition of right-of-use assets and lease liabilities, and related disclosures.
- IRS Publication 946 — How to Depreciate Property The IRS’s annual reference on MACRS recovery periods, methods, conventions, Section 179 expensing, and bonus depreciation.
- Uniform Commercial Code (UCC), Article 9 — Secured Transactions The body of law governing security interests in personal property, including the UCC-1 filings that perfect most equipment liens. Adopted with state-level variations in every U.S. jurisdiction.
- IRS Revenue Ruling 55-540 (1955-2 C.B. 39) One of the longest-standing IRS statements on distinguishing a lease from a conditional sale for tax purposes — the foundation of the true-lease / finance-lease distinction. Cited by name; a tax advisor or the IRS Internal Revenue Bulletin archive is the authoritative source for the full text.