Lease Structuring & Pricing Flashcards

What is 'pre-funding' in vendor equipment finance programs?

Answer: The lessor funds the vendor (pays for the equipment) before all lease documentation is complete, based on the vendor's commitment

Pre-funding allows vendors to receive payment quickly even before all lessee documentation is finalized, accelerating the vendor's cash cycle while the lessor takes on documentation risk.

What is 'economic life' of equipment and why does it matter for lease structuring?

Answer: The period over which the equipment provides useful economic benefit; the lease term generally should not exceed it to ensure adequate residual value

Structuring a lease term beyond the equipment's economic life risks having a worthless asset as collateral at maturity, eliminating residual value recovery for the lessor.

What is a 'master agreement' with 'schedules' structure and why is it preferred for repeat customers?

Answer: The master agreement sets standard terms once; individual equipment schedules are added quickly without renegotiating base terms each time

Once the master is executed, adding new equipment requires only a short schedule, dramatically reducing documentation time and legal costs for ongoing customer relationships.

What is 'lease vs. buy' analysis and what factors favor leasing?

Answer: A comparison of the after-tax cost of leasing versus purchasing; leasing is favored when the lessee lacks capital, values flexibility, or cannot use tax deductions

Lease vs. buy analysis compares total after-tax costs; leasing wins when a company is cash-constrained, wants off-balance-sheet treatment, or values end-of-term flexibility over ownership.

What does 'mid-term upgrade' or 'technology refresh' option provide a lessee?

Answer: The ability to exchange leased equipment for newer technology during the lease term, typically by rolling remaining payments into a new lease

Technology refresh provisions let lessees trade up to newer equipment mid-term, often by rolling remaining obligations into a new lease, keeping them current with fast-moving technology.

What is 'spread management' in a lease portfolio and why is it critical to profitability?

Answer: Monitoring and maintaining the gap between lease yields and cost of funds across the portfolio to ensure adequate net interest margin

Spread management ensures the portfolio consistently generates yields above funding costs; narrowing spreads due to competition or rising rates directly erode profitability.