Manufacturing Blog

Avoid Equipment Obsolescence with FMV Leasing

Avoid Equipment Obsolescence with FMV Leasing

2/20/2018

In today’s rapidly evolving business environment, the only way to stay on the cutting edge is by acquiring new equipment and technologies. Roles like finance, operations and IT often invest significant time in planning these acquisitions to meet their organization’s changing needs. A key decision when manufacturers acquire this new equipment is the method of financing. One of the most beneficial types of financing for technology-based equipment is a Fair Market Value lease (FMV).
 

What are FMV leases?

FMV leases allow lessees to utilize the equipment for a designated number of months with three end of lease options, including:

  1. Continue to lease the equipment
  2. Return the equipment to the lessor and upgrade to new equipment
  3. Purchase the equipment at the then-determined fair market value price

FMV lease terms typically range from 12 to 60 months.
 
FMV leases are  categorized as operating leases for accounting purposes and true leases for tax purposes. Since the lessee does not own the equipment through an FMV lease, this allows the lessee to deduct monthly lease payments as rental expense against their income tax obligations.
 

Why use FMV leases?

  • Spend less. FMV leases are often the most affordable lease structure. Instead of paying 100% on day one through a cash-based purchase, costs are spread out across the useful life of the asset. At First American, customers typically pay 85-90% of the total equipment cost over the course of the lease with a residual insertion that leads to a negative implied interest rate.

  • Gain predictability. With cash-based purchases, companies put themselves at risk of not having enough cash on-hand for day-to-day business expenses, such as unpredictable growth leading to increased wage costs or employee headcount. FMV leasing offers the ability to avoid sudden cash fluctuations and offers fixed, predictable payments.

  • Avoid obsolescence. Purchasing IT equipment can be a commitment to long-term use of a technology. Given the rapid evolution of technology, companies often find themselves burdened with aging equipment. As these assets approach the end of their useful life, the costs associated with hardware maintenance, operating system upgrades, and internal support rise. FMV leasing reduces this risk by offering flexible lease terms aligned to the useful life of your asset.

  • Acquire now, decide later. You’re in the driver’s seat with FMV leasing. Upon end of lease, you do not need to return all of the equipment. You can return some, purchase some or continue to lease some. This type of lease offers the ability to decide at the end of the lease term, as evolving technology can be unpredictable.

  • Experience tax benefits. Payments on FMV leases are fully tax deductible, since the lessee is renting the equipment as a monthly rental expense.

Commonly leased equipment with FMV structure

Most often, customers use FMV leasing for the flexibility of refreshing technology-based equipment and to avoid obsolescence. Common projects include:

  • IT hardware
  • Production equipment
  • Packaging equipment
  • Racking systems
  • Robotics
  • 3D Printers
  • CNC machines
  • Security systems
  • Office equipment


Bottom line

Manufacturers rely on up-to-date technology and equipment to run their businesses and stay competitive. A Fair Market Value (FMV) Lease from First American gives you low monthly payments and a range of options to keep your company up-to-date with the equipment you need.


Learn more about FMV leasing

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