What is a Fair Market Value Lease?

For Small Businesses, staying competitive and efficient is big time when it comes to the growth of any company, especially for small businesses aiming to carve a niche for themselves. One often overlooked avenue that can provide significant advantages is the Fair Market Value (FMV) equipment lease. In this article, we’ll give you some important info into what a FMV equipment lease entails and why it’s a beneficial option for your small business!

So get on with dude…… What is an FMV Lease?

In a nutshell a Fair Market Value equipment lease is a financial arrangement that allows businesses to acquire equipment for their operations without the financial burden of purchasing the equipment outright. Unlike a traditional lease or equipment loan, where the buyer aims to own the equipment at the end of the lease term, an FMV lease is designed to offer flexibility and lower payments by focusing on the equipment’s projected value at the end of the lease. Meaning you usually get lower payments in exchange for a balloon purchase option at the end.

At the end of an FMV lease term, the lessee typically has three options:

1. Purchase the Equipment: The lessee can purchase the equipment at its fair market value at the time of lease expiration. This value is determined by current market conditions and the equipment’s depreciation over the lease term. Often times, this balloon will be capped at say 10% of the expected Fair Market Value of the equipment. This is an important factor to consider when reviewing your FMV terms.
2. Renew the Lease: If the equipment is still essential to the business, the lessee can renew the lease for a new term, often with updated terms and payments based on the equipment’s current value.
3. Return the Equipment: The lessee can choose to return the equipment to the lessor, freeing them from any further obligations related to the equipment. This option is particularly useful when the equipment becomes outdated or no longer meets the business’s needs and thus frees you up to upgrade the equipment without necessarily increasing your monthly payment, sweet right!?

Some other ways this finance structure is helpful:

1. Cost-Efficiency: One of the most significant advantages of an FMV equipment lease for small businesses is its cost-efficiency. Since the lease payments are calculated based on the projected depreciation of the equipment, monthly payments are generally lower compared to traditional lease options or equipment loans.
2. Access to Latest Technology: Rapid technological advancements can leave businesses struggling to keep up. An FMV lease allows small businesses to upgrade their equipment at the end of each lease term, ensuring they always have access to the latest and most efficient technology without the financial strain of purchasing new equipment outright.
3. Preserved Capital: Acquiring equipment through a FMV lease enables small businesses to preserve their capital for other crucial expenses, such as marketing, hiring, or expansion. This liquidity can provide a safety net in unpredictable economic conditions.
4. Tax Benefits: FMV lease payments are often considered operating expenses, which can result in potential tax benefits. Consultation with a tax professional is recommended to understand the tax advantages that may be applicable to your specific situation. But you can typically write off your payments on your taxes as a rental expense potentially savings you BIG when uncle Sam comes knocking!
5. Risk Mitigation: Owning equipment can come with unexpected maintenance and repair costs. With an FMV lease, these risks are often (but not always) transferred to the leasing company, providing small businesses with a predictable budget for equipment-related expenses.
6. Flexibility: The three end-of-lease options provide small businesses with flexibility to adapt to changing circumstances. If the business’s needs evolve, they can adjust their approach without being locked into a long-term commitment.

So What does it all meeeaaann Basil?

In the ever-evolving landscape of business, leveraging financial tools like Fair Market Value equipment leases can be a game-changer for small businesses. These leases provide cost-effective access to up-to-date equipment, financial flexibility, and reduced risk. When contemplating equipment acquisition strategies, small businesses should consider the long-term benefits of an FMV equipment lease as a pathway to growth and success. As always, consulting with financial advisors and industry experts is recommended to make informed decisions tailored to your unique business needs and you need look no further than the experts at Ryzen Capital for this. Give us a call today or click below to get Pre-Approved now!