Equipment Finance Fundamentals Flashcards

What is 'recourse' vs. 'non-recourse' in the context of a lessor selling/assigning leases?

Answer: Recourse means the original lessor remains liable if the lessee defaults; non-recourse shifts all risk to the buyer

In a recourse sale, the selling lessor guarantees the payments and must cover losses if the lessee defaults; in a non-recourse sale, the buyer assumes all credit risk.

What is an 'equipment finance agreement' (EFA) and how does it differ from a lease?

Answer: An EFA is a loan secured by equipment where the borrower owns the asset from day one; a lease keeps title with the lessor

Unlike a lease where the lessor holds title, an EFA is a secured loan in which the borrower/buyer owns the equipment from inception while the lender holds a security interest.

What is 'seasoning' in the context of a lease portfolio?

Answer: The age or payment history of leases in a portfolio, indicating how well lessees have performed over time

Seasoning refers to the elapsed time and payment track record of leases in a portfolio, with more seasoned portfolios showing a proven repayment history.

What is a 'synthetic lease' primarily designed to accomplish?

Answer: Provide off-balance-sheet treatment for the lessee under older accounting rules while qualifying as a loan for tax purposes

A synthetic lease was structured to be an operating lease for GAAP (keeping debt off the balance sheet) but a loan for tax purposes, allowing the lessee to claim depreciation deductions.

In equipment leasing, what is a 'step-up' payment structure?

Answer: Lease payments that increase at predetermined intervals over the lease term

A step-up payment schedule starts with lower payments that increase at set intervals, matching a business's expected revenue growth or the equipment's productivity ramp-up.

What is 'remarketing' in equipment leasing and why is it important to lessors?

Answer: The process of selling or re-leasing equipment returned at lease end to recover residual value

Remarketing involves disposing of off-lease equipment through sale or re-lease to realize the residual value, directly impacting the lessor's overall return on the transaction.