CLFP Equipment Finance Fundamentals 2 — Questions and Answers
Question 1: What is a 'TRAC lease' primarily used for?
- Financing over-the-road vehicles and transportation equipment with a Terminal Rental Adjustment Clause (Correct answer)
- Financing agricultural equipment
- Financing government-owned properties
- Financing real estate under IRS rules
Correct answer: Financing over-the-road vehicles and transportation equipment with a Terminal Rental Adjustment Clause
A TRAC (Terminal Rental Adjustment Clause) lease is specifically designed for vehicles and transportation equipment, with a final payment adjusted based on actual vs. estimated residual value.
Question 2: In equipment finance, what does 'LTV' stand for and why is it important?
- Loan-to-Value; it measures how much financing is extended relative to the equipment's value (Correct answer)
- Lease Term Variable; it tracks payment frequency changes
- Long-Term Volume; it measures total lease portfolio size
- Lessee Total Value; it assesses overall creditworthiness
Correct answer: Loan-to-Value; it measures how much financing is extended relative to the equipment's value
LTV (Loan-to-Value) is a key underwriting metric that compares the financed amount to the equipment's value, indicating the lessor's collateral coverage.
Question 3: What is 'soft cost' financing in equipment leasing?
- Financing of non-tangible costs like installation, training, software, or freight bundled with equipment (Correct answer)
- Financing for used or refurbished equipment
- Financing with no credit check required
- Financing exclusively for small businesses
Correct answer: Financing of non-tangible costs like installation, training, software, or freight bundled with equipment
Soft cost financing allows lessees to include ancillary expenses like installation, training, warranties, and software in the lease, rather than paying them separately.
Question 4: What is the 'money factor' in equipment leasing?
- A decimal number used to calculate the finance charge portion of a lease payment (Correct answer)
- The percentage of equipment cost paid upfront
- The lessor's profit margin on a deal
- The ratio of hard to soft costs in a lease
Correct answer: A decimal number used to calculate the finance charge portion of a lease payment
The money factor is a small decimal (e.g., 0.00250) that represents the finance charge in a lease; multiplied by 2,400 it approximates the equivalent annual interest rate.
Question 5: What does 'advance payment' mean in the context of a lease structure?
- Lease payments made at the beginning of each period rather than at the end (Correct answer)
- A security deposit paid before equipment delivery
- The first payment covering installation costs
- An extra payment to reduce the residual
Correct answer: Lease payments made at the beginning of each period rather than at the end
An advance payment structure means payments are due at the start of each period (beginning of month/quarter), as opposed to an arrears structure where payments are due at period end.
Question 6: What is the role of a 'broker' in the equipment finance industry?
- An intermediary who originates transactions and places them with funding sources (lessors/lenders) for a fee (Correct answer)
- An independent equipment appraiser
- A government licensing authority for lessors
- A collections specialist for defaulted leases
Correct answer: An intermediary who originates transactions and places them with funding sources (lessors/lenders) for a fee
Brokers originate equipment finance transactions from end-users and earn a fee by placing those deals with funding sources, without using their own capital.
CLFP Equipment Finance Fundamentals 2
What is a 'TRAC lease' primarily used for?