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Fundamentals of Open-End Leasing

Many businesses use some form of financing to obtain new or used commercial vehicles and equipment. These funding sources are through loans, leases, and other financial instruments.

What is an Open-End Lease?

It is an agreement where the monthly payment and buyout value are specified at the start of the lease. There are no annual kilometer restrictions or wear and tear clauses in this type of lease. At the end of the lease term, the customer guarantees the value of the asset (referred to as the “residual value”). At the end of the lease term, the customer may buyout the predetermined amount (residual) or they have the option to sell/trade the asset in order to upgrade the asset, if required. Open-End Leasing is also commonly known as “Rent-to-Own” Leasing.

From vehicles, small equipment to heavy machinery, it is possible to lease almost anything for your business.

Upside of an Open-End Lease

There are many advantages to an Open-End Lease, such as:

  1. Acquiring the needed assets without paying the full costs up front and keeping lines of credit available,
  2. Various payment types available through our various funding sources, including “Skip Payment” option.
  3. Accounting benefits can be utilized from an Open-End Lease as well, for example, lease payments are typically deducted as a business expense instead of reporting as depreciating assets on financial statements.
  4. Easier to upgrade assets when a lease nears the end of the term or expires.
  5. Provides a lower monthly payment and minimizes or eliminates the downside of a depreciated future value risk.
  6. Automotive Open-End Lease does not have a kilometer restriction or wear and tear penalties at the end of the term which is commonly confused with a Closed-End Lease.
  7. Appropriate for any business at any stage of development. When it comes to startup businesses, it is likely the owner will be obliged to be a co-lessee in order to secure the lease BUT most Open-End Leasing programs do not report to the personal credit bureau. Thus, protecting the personal buying power of the co-lessee.

Downside to an Open-End Lease

Potential higher cost of borrowing over the long term, this will depend on the lease program the asset and credit applicant qualifies for. Also, a lease may commit you to keep the vehicle or equipment for a specified period of time. There may or may not be a penalty for early termination of a lease, again this will vary based on the lender and the leasing program. Still, the Equipment Leasing and Finance Association (ELFA) estimate that 4/5th of businesses lease some of their assets – a testament to the usefulness of the practice.

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