Conventional Financing Vehicles

The following is a list of general conventional financing vehicles, with brief descriptions of each: 1. A commercial loan is a formal agreement in which a lender provides a borrower with funds for a stated purpose. It is backed by the full faith and credit of the borrower. Loans may be secured by the particular asset being purchased, and/or with additional assets of the company, such as accounts receivable, property, or other tangible assets.

2. A conditional sales agreement is an agreement for the purchase of an asset in which the borrower is treated as the owner of the asset for federal income tax purposes, but does not become the legal owner of the asset until the terms and conditions of the agreement have been satisfied. This entitles the borrower to the tax benefits of ownership, such as depreciation.

3. A capital lease (lease/purchase) is a rental agreement backed by the full faith and credit of the lessee (borrower). These typically have a $1 purchase option that may be exercised by the lessee at the end of the lease term.

4. An operating lease is a lease that has the financial reporting characteristics of a usage agreement and also meets certain criteria established by the Financial Accounting Standards Board (FASB). Generally, an operating lease is not required to be shown on the balance sheet of the lessee. Operating leases also include conditions in which the lessor has taken a significant residual position in the lease pricing and, therefore, must salvage the equipment for a certain value at the end of the lease term in order to earn its rate of return.

5. A true lease is a long-term rental agreement that contains fair market value purchase options, which may be exercised by the lessee at the end of the lease term. Since it is unknown if the equipment will ultimately be purchased, rental payments are usually expensed for tax purposes.

Guide to Alternative Fuels

Guide to Alternative Fuels

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