Glossary

We appreciate there is a lot of new terminology to understand, and your account manager will assist you, however we have provided this brief online guidance in addition to their support.

 

Click on each term for brief description.

 

 

 

Advance Rentals

Payments made by the lessee at the start of a leasing agreement process.
Quite often demonstrated as 3 + 33 For a 3 year agreement whereby the first 3 months are paid upfront.

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Annual Percentage Rate

“The annual rate of interest on a credit agreement.  For regulated consumer credit, the APR is calculated in a standard way to include all costs which the borrower will pay under the terms of the agreement.”

For Example;
£10,000 over 3 years
36 monthly repayments of £327.34
Flat Rate - 5.78%
APR - 12.76%
IRR - 10.99%

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Assets

“Items of plant and equipment that might be leased.  In general, plant is immovable and equipment is movable, although in some circumstances equipment may be treated as fixed to a building for legal and tax purposes.  In addition to these tangible items, some intangible assets such as software licences might also be leased.  Assets may also be categorised as Hard assets or Soft assets for leasing purposes.”

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Assignee

A person, company or entity to which the benefits under the agreement may be transferred.

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Assignor

A person, company or entity who makes the transfer of benefits under an agreement.

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Back to Back Lease

“Where assets are leased to another lessor and then  subleased on the same terms to the end-lessee.”

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Capital Allowances

“The amount of depreciation that can be offset against taxable profits, reducing the amount of tax paid.  Commercially calculated depreciation is not allowable for tax but instead of this, tax has its own system of writing down assets by capital allowances generally given annually with a balancing allowance or charge when the asset is disposed of.  The tax rules are complicated but for hire purchase and most finance leases the lessee claims the capital allowances and for most operating leases it is the lessor.”

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Certificate of Acceptance

A document signed by the lessee acknowledging that the equipment to be leased has been delivered and is acceptable.

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Consumer Credit Act

“Legislation that governs agreements with unincorporated bodies where the transaction is non-exempt.  Exemptions may apply to agreements over £25,000 for business use and to high net worth individuals.  Some parts of the Act have been incorporated into the FCA’s Handbook and have been repealed but other parts (the ‘retained provisions’) remain in place.”

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Co-terminous

“Where two or more leases are started at different times but have the same finish date.  This may happen if, for example, a lessee wishes to add some extra cars to its fleet.  It is more commonly found in the property rather than equipment leasing market.”

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Credit Line

A pre-agreed financial limit under which the end user/customer may enter into one or more agreements for the on-going acquisition of equipment up to that limit.  The limit will be periodically reviewed and may be adjusted either way to accommodate the customers on-going requirements.  The benefit in establishing a credit line is to minimise the time and paperwork involved in underwriting new agreements, and provides the customer with greater budgetary control.

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Fixed Term Rental

“A lease where the equipment is expected to be returned to the lessor at the end of the lease period, there being no other contractual option.  This does not prevent the lessor then negotiating further rentals or selling the ex-lease equipment to the former lessee at a realistic market value.  Fixed term rental tends to be used in support of vendor programmes, as the vendors’ aim would be to replace old equipment for new.”

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Flat Rate

The interest charge for a lease calculated by dividing the amount financed by the interest charged per year.”

For Example;
£10,000 over 3 years
36 monthly repayments of £327.34
Flat Rate - 5.78%
APR - 12.76%
IRR - 10.99%

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Full Payout Lease

“A lease where the agreed lease payments in the initial lease term are sufficient to pay for the asset, interest, other costs and the margin for the lessor.  When pricing a full-payout lease the lessor does not rely on the asset having residual value or on there being a secondary period.”

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Guarantee

“An undertaking to answer for the payment of a debt, or the performance of any other type of obligation, in the event of the default of another person primarily responsible for it.”

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Hire Purchase

“An arrangement that gives the lessee an option to buy the asset from the lessor at the end of the lease period, provided the lessee has kept to the terms of the agreement.”

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Indemnity

“An undertaking by one person to meet the identified potential liability of another.  Lessors will generally include an indemnity clause in the lease agreement under which the lessee accepts responsibility for all risks associated with the asset during the lease agreement.  The lessee agrees, for example, to pay any legal expenses or penalties, if someone is injured when using the asset.  A company director or sister company may indemnity the lessor in relation to any amounts owed by the lessee; this often forms part of a guarantee.”

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Initial Period

The finance agreement initial period begins when the transaction is processed and payment to the vendor had been made.  The initial period will continue until the customer has made all the payments and fulfilled all specified obligations under the terms and conditions of the agreement.

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Internal Rate of Return

Is used to evaluate the attractiveness of a project or investment.

For Example;
£10,000 over 3 years
36 monthly repayments of £327.34
Flat Rate - 5.78%
APR - 12.76%
IRR - 10.99%

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Lease

“Agreement by which the owner of the asset (the ‘lessor’) allows another party (the ‘lessee’) to use an asset in return for payment.  Some would use the term to refer specifically to hire agreements that have no purchase option, but a wider definition may also apply.”

For Example;
£10,000 over 3 years
36 monthly repayments of £327.34
Flat Rate - 5.78%
APR - 12.76%
IRR - 10.99%

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Lessee

“User of an asset owned by someone else under the terms of a lease agreement.”

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Lessor

“Owner of an asset used by someone else under the terms of a lease agreement.”

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Loan

One way that a company may fund the acquisition of new equipment is through a loan from a bank or other financial institution.  The loan however is in no way linked to the asset that is being purchased.

For Example;
£10,000 over 3 years
36 monthly repayments of £328.98
Flat Rate - 5.97%
APR - 12.67%
IRR - 11.34%

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Minimum Period

“A lease that will carry on indefinitely until it is cancelled after a defined minimum hire period.  The rental payments will usually remain at the same level and frequency after the minimum period.  It tends to be used where there is not expected to be an extension beyond the initial term.”

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Operating Lease

“A lease where the lessor retains the risks and rewards of owning the asset.  According to IAS 17, indicators that a lease is an operating rather than finance lease include the lease term being for less than a major part of the economic life of the asset, the lessee not having any option to purchase or a bargain purchase option, and the present value of the lease payments being less than the value of the asset.
For UK tax, the lessor is eligible for capital allowances unless the lease is caught by the long-funding lease rules.  If the lease is for more than 5 years, term is more than 65% of the asset’s useful life and/or the lease payments are more than 80% of the asset’s original value then the lessee is eligible for allowances.”

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Rental

“The regular amounts paid by the lessee to the lessor during the term of the lease agreement.  May also be referred to as lease payments, although lease payments would also include any fees or other additional charges.”

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Upgrade

A method of adding to, changing or replacing equipment on a lease agreement.

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Writing Down Allowances
An agreement commences when it has been accepted by a lessor assuming that the equipment has been delivered and installed, an invoice has been raised by the vendor and the lessor has paid the vendor.  The agreement is then considered to be active or live.

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