Equipment Finance Glossary

Advance payments: Periodic payments — commonly the first, sometimes also the last — collected when a lease is signed. They apply to the payment schedule; they are not a down payment.
Amortization: Paying a debt down through scheduled installments of principal and interest until the balance reaches zero. An amortization schedule shows how each payment splits between the two.
Balloon payment: A large lump sum due at the end of a term that carried smaller regular payments. It lowers the in-term payment in exchange for a known bill at the end.
Blanket lien: A security interest covering substantially all of a business's assets rather than one piece of equipment. An existing blanket lien from another creditor can complicate new equipment financing, because lien priority has to be sorted out.
Bonus depreciation: A federal tax provision allowing a percentage of qualifying equipment cost to be deducted in the first year. The percentage is set by law and changes; confirm current rules with a tax professional.
Collateral: The property a lender can claim if the debt is not paid. In equipment finance, the collateral is usually the equipment itself, which is why its age, condition, and resale market matter to underwriting.
Corp-only deal: A transaction approved on the business's credit alone, with no personal guaranty from the owners. Typically reserved for established companies with strong financials and borrowing history in the company's name.
Debt-service coverage ratio (DSCR): Cash flow available for debt payments divided by total debt payments. A ratio above one means operations generate more cash than the debt requires; lenders use it to judge whether a new payment fits.
Documentation fee: A flat fee charged for preparing and processing the final transaction documents. Ask for every fee in writing before signing.
Dollar buyout ($1 buyout): A lease under which you purchase the equipment for one dollar at the end of the term. Economically it works like a loan: you are buying the machine on an installment schedule.
Down payment: Cash paid toward the purchase price at closing, reducing the amount financed. Distinct from advance payments on a lease, which are scheduled payments collected early.
Early buyout option (EBO): A contractual right to purchase leased equipment at a set point before the end of the term, at a price fixed in the agreement.
Equipment finance agreement (EFA): A financing contract under which the borrower owns the equipment and the lender holds a security interest in it. The finance charge is built into the payment schedule rather than quoted as a stated interest rate, so compare EFAs on total cost.
Fair market value (FMV) lease: A lease that ends with a choice: return the equipment, renew, or buy it at its then-current market value. In-term payments run lower than ownership structures because the lessor keeps the residual risk.
Finance lease: An accounting classification for leases that transfer most of the risks and rewards of ownership to the lessee. Classification affects how the expense appears on financial statements; your accountant makes the call.
Guaranty (personal guaranty): A signed promise that an individual — usually the owner — will repay the obligation personally if the business does not. Standard on most small-business equipment transactions.
Hard inquiry / soft inquiry: Two kinds of credit pull. A hard inquiry is recorded on the credit report and can influence scores; a soft inquiry is a review that other lenders do not see. Which kind a lender uses, and when, varies — ask before authorizing.
Hell-or-high-water clause: A lease provision making the payment obligation absolute: you pay even if the equipment breaks or disappoints. Your remedies for a bad machine run against the vendor or manufacturer under warranty, not against the lessor.
Lessee / lessor: The two parties to a lease. The lessor owns the equipment; the lessee pays for the right to use it.
Master lease agreement: One negotiated framework agreement under which additional equipment is added by schedule, without renegotiating terms each time. Useful for businesses that acquire equipment repeatedly.
Operating lease: An accounting classification for leases that function more like rentals, with the expense generally recognized evenly over the term. The classification rules are technical; involve your accountant.
Origination fee: A fee charged for setting up the financing, quoted flat or as a percentage of the amount financed. Include it when comparing total cost between offers.
Progress payments: Disbursements a lender makes in stages to an equipment builder while a machine is being manufactured, before final delivery and acceptance. Common on long-build or custom equipment.
PUT option (purchase upon termination): A lease term obligating the lessee — not merely permitting it — to buy the equipment at the end of the term at a fixed price. Know that price before you sign, because it is not optional.
Rate factor: A decimal multiplier some lessors quote instead of an interest rate: payment equals factor times equipment cost. A rate factor is not directly comparable to an interest rate, so ask for the full schedule and total of payments.
Residual (residual value): The projected value of equipment at the end of a lease term. The residual assumption shapes in-term payments and sets the stakes for FMV, PUT, and TRAC structures.
Sale-leaseback: Selling equipment your business already owns to a financing company for cash, then leasing it back and continuing to use it. A way to raise working capital from owned iron; the amount available tracks the equipment's appraised value.
Seasonal payment structure: A payment schedule shaped around a business's revenue seasons — smaller payments in the off-season, larger ones when cash comes in. Offered by some programs for agriculture and other seasonal trades.
Section 179: A federal tax election allowing a business to deduct the cost of qualifying equipment in the year it is placed in service, up to annual limits that change. Financed equipment can qualify; confirm eligibility and current limits with a tax professional.
Soft costs: The non-equipment costs in a purchase: freight, rigging, installation, training, software, extended warranties. Lenders differ on how much of them can be financed, so itemize them on the quote.
Term sheet: A written summary of proposed terms — amount, term, payment, conditions — issued before final documents. It frames the deal; it is not a commitment to fund until the conditions in it are met and documents are signed.
Time in business (TIB): How long the entity has operated, a standard underwriting factor. Longer operating history generally opens more programs; the earliest years draw the most scrutiny.
TRAC lease: A terminal rental adjustment clause lease, used for titled highway vehicles such as tractors and trailers. The residual is fixed up front; at the end, the difference between that figure and the vehicle's sale proceeds is settled between lessee and lessor.
UCC-1: A financing statement filed in public records to perfect a lender's security interest in specific collateral. UCC filings appear in lien searches, which is why knowing your own filings before applying saves time.
Vendor program: A standing arrangement under which an equipment seller offers financing options to its customers at the point of sale, with the lender typically paying the vendor's invoice directly at funding.
Working capital: The cash a business has available for daily operations — current assets minus current liabilities. Equipment structures affect it differently: down payments draw on it, while sale-leasebacks are used to raise it.

Equipment Finance Glossary

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