Leasing Glossary

ASSET The item/equipment being leased.

ASSET-BASED FINANCING The financing of equipment and vehicles and of related items or services, primarily by way of lease, but also by secured loan or conditional sales contract. The asset being financed constitutes the sole security given to the lender.

ASSET SCHEDULE A document that describes in detail the asset being leased. It may also state the lease term, commencement date, repayment schedule and location of the asset. In Canada this is referred to simply as a schedule. When attached to a lease document, a schedule is denoted by the Alphabet, always starting with ‘A’ Most often seen when the amount of space on a lease document is insufficient to list all of the equipment.

ASSIGN A Lessor, as outlined in the terms and conditions page of a lease document, has the right to sell the lease to another party. When this happens, it is assigned. This process can be a source of concern for lessees who heretofore have not been aware of the assignee. There cannot be an additional charge made to the lessee when this happens, except in the case of default.

ANNUAL PERCENTAGE RATE The total carrying cost paid by a consumer lessee over the term of a consumer lease expressed as an annual rate. For the purposes of statutory consumer cost of credit disclosure requirements, the APR is intended to be similar to the cost of borrowing charges on a consumer loan. (Turning the Lights on Leasing, a Consumer Guide to Vehicle Leasing)

BANK RATIOS Banks and most lenders have ratios that they use to assess credit. Most common of these is the cash flow ratio or the acid test ratio. Many lenders develop their own ratios based on their internal credit appetites and vary with the applicant and/or the asset.

BALLOON PAYMENTS Larger than normal payments, usually occurring at the end of the lease term (sometimes called a "bullet"). (Leasing in Canada [Third Edition], Ralph Selby FCA, Butterworths, 1999

BARGAIN PURCHASE OPTION [see also Bargain Renewal Option, Fair Market Purchase Option, Fixed Purchase Option, and Purchase Option] An option given to the lessee to purchase the leased property at a price that is less than the expected fair market value so that, at the inception of the lease, it is reasonable to assume that the lessee will if acting rationally exercise the option to purchase. (Blake, Cassels & Graydon LLP)

BIG-TICKET A market segment generally represented by lease financings over $1 million (over US$2 million in the United States - U.S. Equipment Leasing Association)

BROKER A company or person who arranges, for a fee, transactions between lessees and lessors of an asset. (U.S. Equipment Leasing Association) CCA See Capital Cost Allowance

CONTRACTOR Specifically, DLC Leasing Independent Contractor. For the purpose of providing you with the most advantageous tax position, Sales Department Consultants have signed an agreement as an independent contractor.

CAPITAL COST ALLOWANCE (CCA) Capital Cost allowance (the annual amount which a taxpayer may deduct in computing taxable income). (Leasing in Canada [Third Edition], Ralph Selby, FCA, Butterworths, 1999)

CAPITAL LEASE An accounting term meaning a lease which transfers substantially all of the risks and benefits of ownership of the leased property to the lessee. The criteria set out in the Canadian Institute of Chartered Accountants handbook provide that a lease will be treated as a capital lease if it meets any of the following criteria: • title passes automatically at the end of the lease term; • the lease contains a bargain purchase option (i.e. less than fair market value) • the lease term is greater than 75% of the estimated economic life of the leased property; or • the present value of the minimum lease payments is greater than 90% of the leased property’s fair market value at the inception of the lease.

CERTIFICATE OF ACCEPTANCE (Delivery and Acceptance) A document whereby the lessee acknowledges that the equipment to be lease has been delivered, is acceptable, and has been manufactured or constructed according to specifications. This usually forms part of the lease document but in some circumstances and with some funders, this document is separate.

CERTIFICATE OF INCORPORATION Bearing a government issued seal; this certificate is proof of authenticity of name and date of a legal business entity. Consider it the equal to a Birth Certificate. It is the first page in a company’s Minute Book. If a company is unable to supply a Certificate of Incorporation, a Provincial Registry Search Document will suffice. (for which there is a $16-$30 charge)

CONDITIONAL SALE [see also Installment Sale] A conditional sale occurs when possession of property is transferred, but ownership passes only after the sale meets certain conditions, such as full payment of the purchase price. A conditional sale is not a lease. (PricewaterhouseCoopers LLP)

CONSUMER Consumer means a natural person who is offered, acquires or uses a good or service primarily for personal, family or household purposes

COVENANT To promise by or as if by a covenant. A binding agreement. Often used to refer to the person offering the covenant, or the person applying for credit and therefore, the person or entity signing the lease document. Often, there is reluctance to sign as a co-lessee: it is therefore important to understand that this reluctance is associated with the applicant’s level of confidence in their enterprise. If they are not willing to stand behind their own business, why would anyone else? CRA Canada Revenue Agency. Also known as Canada Customs and Revenue Agency. Formerly known as Revenue Canada. Also known by many more colorful names.


CREDIT AVAILABILITY Also expressed as a ratio. The amount of available credit that is in use. A higher amount of available credit is preferable and gives a better Equifax beacon score. A Beacon score is based, in part, on the amount of credit the applicant has established and the corresponding percentage of that credit that is in use. Percentages of credit usage under 50% are considered preferable.

CREDIT BUREAU There are several ‘credit bureaus’ in Canada and the US. They are ‘for profit’ non-governmental businesses that collect credit and other data for the purpose of reselling it. Most commonly used in Canada; Equifax, Laurentian, Trans Union, Dun & Bradstreet (D&B)

CREDIT CHECK Commonly understood to be obtaining a credit bureau report.

CREDIT HIT Every time a credit check is performed, a credit ‘hit’ (record of date and authorized requesting party) is recorded. A credit hit can be a negative if the applicant is shopping for credit at too many places. Credit people will sometimes comment that the applicant is ‘shopping’. This can indicate credit problems on the horizon. However, credit hits are only negative when the overall credit situation is shaky. An entity with good credit will not suffer from a reasonable number of credit hits from reputable credit granters. If the credit hits are coming from payday loans companies, and the like, the message is different than hits from the Mercedes and BMW and Porsche dealers.

CREDIT PROFILE Usually expressed as A-B-C or as prime and sub-prime. Shorthand for the ability of an applicant to get credit approved.

CREDIT SPECTRUM The entire range of credit ability. DLC Leasing handles the entire credit spectrum. From the barely approvable to AA credit.

CROSS CORPORATE GUARANTY Where One company backs-up another company by co-signing a lease. Most funders will insist that there be a link between the companies. Usually where a large company starts up a subsidiary company and then has to sign cross-corporate or there is a common shareholder.

D & I Delivery And Installation also known as a verbal audit. Funders pay upon receipt of complete paperwork THEN upon acceptable D&I phone call to lessee. It is often important to coach the lessee in how to handle this call. Let your lessee know that they will be receiving this call and that they should respond that yes they have the equipment and that it is working. This can be major source of dissatisfaction from your vendor if not handled properly.

DEAL The process and project of getting an application and transforming it into a signed lease and getting paid for it. Your goal is one deal per day.

DEAL BREAKER A deal breaker is a significant issue relating to the proposed financing between the prospective investor and the entrepreneur that needs to be resolved in order to close the deal.

DRIVE-BY CREDIT Assessing credit worthiness by ‘driving by’ a business. What does the business look like from the curb. Does the speculative assessment you did over the phone match the reality you see out your window. Without pulling a credit bureau or getting a credit application, does it look like this business is worth spending time on?

DUE DILIGENCE The process of systematically evaluating information, to identify risks and issues relating to a proposed transaction.(ie verify that information is what it is proposed to be). A form of research. Most users of this term have their own industry specific meaning.

ECONOMIC LIFE Estimated remaining period during which the property is expected to be economically usable by one or more users, with normal repairs and maintenance. (KPMG LLP) The period during which an asset is expected to have economic value to one or more users. (Leasing in Canada [Third Edition], Ralph Selby, FCA, Butterworths, 1999) The period of time during which an asset will have economic value and be usable. (U.S. Equipment Leasing Association) EFT Acronym: Electronic Funds Transfer. In banking terms, all PAPs are electronically transferred funds.

ELEVATOR SPEECH A good 8 second description of what you do is probably more important in the lease brokerage industry than almost any other business you can name. ‘We provide financing for equipment.’ ‘We compete with banks to provide better finance solutions.’ If you know the industry the audience is in, you would modify the statement i.e. ‘We help make your lathe an income generator instead of a depreciating asset.’

ENTITY In law, an entity is an individual or a business that is capable of entering into a contract.

EOT acronym: End of Term. See Residual.

EXECUTE When the funder has accepted the signed lease document, he signs the document as the lessor, thereby executing the lease. To finalize the lease.

EXECUTIVE SUMMARY Also known as a Write-up. Concise assessment of the situation that includes: Who, What, Where, When, Why and How. Should convey information that the credit application and other supplied information does not cover or where an explanation will enhance the application. Pictures can be used. A proposed structure for a non-standard lease can be offered here. A good write-up can turn a decline into an approval.

EXECUTORY COSTS Costs related to the operation of the leased property (e.g. insurance, maintenance cost, and property taxes).

FACTORING Type of financial service whereby a firm sells or transfers title to its accounts receivable to a factoring company, which then acts as principal, not as agent. DLC Leasing does not currently promote factoring as a brokerage service. However, we have brokered several deals and have good funders for this service. You can answer yes when asked if you provide factoring however you should recognize that most situations start and end up as time wasters. Initially, your first question is: ‘We need to see your most current Accounts Receivables’ If your customer can provide you with verifiable receivables, you need to complete a credit application, then set up an appointment to go over a secondary credit interview with questions provided by the factor/funder.

FAIR MARKET PURCHASE OPTION [see also Bargain Purchase Option, Bargain Renew-al Option, Fixed Purchase Option, and Purchase Option] An option to purchase leased property at the end of the lease term at its then fair market value. The lessor cannot retain title to the equipment if the lessee chooses to exercise the purchase option. (U.S. Equipment Leasing Association)

FAIR MARKET VALUE The amount that a "reasonable person" would pay in a competitive market. (Leasing in Canada [Third Edition], Ralph Selby, FCA, Butterworths, 1999) FMV usually ends up being 17 to 22% in Canada. FEE The amount a broker charges to handle the transaction also known as a Broker Fee.

FINANCIALS Accountant prepared company financial statements complete with: Notes to Reader – not to be confused with ‘internally prepared statements’ or ‘projections’ neither of which will receive any consideration from lenders.

FIXED PURCHASE OPTION [see also Bargain Purchase Option, Bargain Renewal Option, Fair Market Purchase Option, and Purchase Option] An option given to the lessee to purchase the leased property from the lessor on the option date for a guaranteed price, determined at the inception at the lease. (Blakes Cassels & Graydon LLP)

FUNDER A term not currently found in any spell checker. The entity that provides the money for a lease also known as an Underwriter. The funder is the lessor.

FUNDER RATIOS Funders require their brokers to maintain business flow ratios. A rule of thumb ratio; 75% of your applications should be approved and 50% of your approvals should be funded.

GAAP See Generally Accepted Accounting Principles

GOING CONCERN A business that is expected to be profitable and to be in business for the foreseeable future. A term most often used by Accountants

GOODS & SERVICES TAX (GST) A national value-added tax imposed on taxable supply of goods and services provided in Canada. Supply is defined to include sale, transfer, barter, exchange, licence, rental, lease,gift or disposition.

GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP) do we need this twice? Accounting practices which have been codified in the (Canadian Institute of Chartered Accountants) CICA Handbook, or which are in common usage. (Leasing in Canada [Third Edition], Ralph Selby, FCA, Butterworths, 1999)

GSA General Security Agreement. A banking document that gives the bank recourse on all property owned by its customer. Leasing companies have 9 working days to securitize equipment before it falls under the inclusion of the GSA. Your Sales Manager will discuss this with you in detail

INTERNALS Financials prepared internally and without the benefit of outside verification.

LEASE A contract in which one party conveys the use of an asset to another party for a specific period of time at a predetermined rate.

LEASE TERM The lease term is the fixed non-cancellable term of the lease plus: • all periods covered by bargain renewal options; • all periods for which failure to renew would impose on the lessee a penalty sufficiently large that renewal appears reasonably assured; • all periods covered by ordinary renewal options where the lessee has undertaken to guarantee the lessor’s debt related to the leased property; • all periods covered by ordinary renewal options preceding the date on which a bargain purchase option is exercisable; and • all periods representing renewals or extensions of the lease at the lessor’s option. (KPMG LLP)

LEASE RATE (Rental Payment) The periodic rental payment to a lessor for the use of assets. Or the lease rate as the implicit interest rate in minimum lease payments. (U.S. Equipment Leasing Association)

LENDING RATIO, PERSONAL The common bank method of determining borrowing capacity. 40% of income for shelter, 30% for basic living expenses. The remaining 30% has to cover other debt.

LESSEE The party who is obligated to pay rental to the lessor in exchange for use and possession of the leased property. (Blake Cassels & Graydon LLP) The party who obtains the use of an asset through a lease agreement. (Leasing in Canada [Third Edition], Ralph Selby, FCA, Butterworths, 1999) The user of the equipment being leased. (U.S. Equipment Leasing Association)

LESSOR The party who has legal title to the leased property and grants the lessee the right to use and possess the leased property in exchange for a rental amount. (Blake Cassels & Graydon LLP) The party who owns the leased asset. (Leasing in Canada [Third Edition], Ralph Selby, FCA, Butterworths, 1999)

LOC Acronym: Line of Credit.

MASTER LEASE A contract where the lessee leases currently needed assets and is able to acquire other assets under the same basic terms and conditions without negotiating a new contract. (U.S. Equipment Leasing Association)

MIDDLE MARKET (or Mid-Ticket) A market segment generally represented by financings over $100,000 but under $1 million. (Over US$100,000 but under US$2 million in the United States - U.S. Equipment Leasing Association)

MINIMUM LEASE PAYMENTS Lessee: The minimum rental payments called for by the lease over the lease term; plus • any guarantee by the lessee of the residual value of the leased property at the end of the lease term; and • any penalty required to be paid by the lessee for failure to renew or extend the lease at the end of the lease term. If a bargain purchase option exists, then only the minimum rental payments and the bargain purchase option are included in the lease payments. Lessor: The minimum lease payments for the lessee as described above and any residual value or rental payments beyond the lease term guaranteed by a third party unrelated to the lessee or lessor.

MODEL For the purposes of our industry, a model is ‘a way of doing things’, a mode, a business plan capsulized. The DLC Leasing business Model is to market lease services.

NET LEASE A lease wherein payments to the lessor do not include insurance and maintenance, which are paid separately by the lessee. (U.S. Equipment Leasing Association)

OPERATING LEASE [Compare to Capital or Finance Lease] A lease which does not transfer substantially all the benefits and risks incident to ownership of property. (KPMG LLP) Any lease that is not a capital lease. These are generally used for short term leases of equipment. The lessee can acquire the use of equipment for just a fraction of the useful life of the asset. Additional services such as maintenance and insurance may be provided by the lessor. (U.S. Equipment Leasing Association)

ORIGINATIONS A sales and marketing term referring to the entity that brings the customer to the table. The lease industry is said to be composed of Originations and Funding. A salesman is in the business of originating the business. Brokers are originators for Funders.

PACKAGER The leasing company, investment banker, or broker who arranges a leveraged lease.

PAPP Pre Authorized Payment Plan, most often in the form of a Voided cheque. Some funders require a separate document to confirm and detail this legal process. Also known as PPA (Pre Payment Authorized)

PG Acronym: Personal Guaranty. Although not entirely accurate in terms of what it says or means, this industry accepted Acronym refers to the requirement of the applicant to provide personal information in order to get a credit approval. On a credit application, Principal Details is the area that is being referred to. Providing ‘PG’ does not necessarily mean that the lease is being guaranteed. The most common result is that the individual providing ‘PG’ will need to appear on the lease document as a co-lessee. Credit personnel will often respond to weak credit application with; ‘need PG’. This is shorthand for, get personal information and we will re-consider it. PG is required for new business (under 36 months) and for credit applications where there is no public information available to support the application. i.e.: Equifax report shows no trades or credit lines.

PRE-TAX All quotes are expressed without tax. Vendors must be constantly reminded that you require a pre-tax amount. The Lessee pays the tax on the monthly lease payment. The vendor is paid the appropriate amount of tax by the funder.

PRINCIPAL The obligation due exclusive of interest. Often referred to as Principal Amount, the face value of a debt without the interest.

PROGRESS PAYMENTS Partial payment to a supplier prior to delivery or prior to final installation. Often used in large deals and where equipment is imported from the US. The lessee will have to sign additional documents to acknowledge payment prior to final acceptance.

PROVINCIAL REGISTRY Each province has its own registry. Equipment is registered and therefore securitized in the province in which the lease payments are made. A British Columbia company does not avoid paying provincial tax by purchasing in Alberta because they pay the taxes of the province in which the lease payments are made from.

PURCHASE OPTION [See also Bargain Purchase Option, Fair Market Purchase Option, Fixed Purchase Option] A provision by which a lessee has the right to purchase the equipment at the end of the lease. The purchase option may be stated at a specified amount or at fair market value. (U.S. Equipment Leasing Association)

RATE FACTOR A number, representing an all-inclusive price, for the purpose of simplifying a quote. The most common of which is $36 per thousand over 36 months.

RENTAL PAYMENT See Lease Payment

RESIDUAL VALUE The estimated fair value of the leased property at the end of the lease term. (KPMG LLP) The value of leased property at the end of the lease term. (Leasing in Canada [Third Edition], Ralph Selby, FCA, Butterworths, 1999) The residual value is, unless otherwise stated on the lease, the estimated wholesale value of the leased vehicle at the end of the lease.

SALE LEASEBACK Where equipment purchased by a company is sold to a lease company and where the lease company then leases the equipment back to the company. Most funders will approve leasebacks where the equipment is under 60 days old and where finalized payment has been proven. (cancelled cheque, paid credit card statement). Requires a write-up that details the circumstances. In order to ascertain the viability of this transaction, you should ask two questions: 1)When was the equipment purchased 2)Has it been paid for.

SECURITIZE Using provincial guidelines, equipment ownership is registered. Equipment other than the asset being loaned against can be added as additional security. The funder securitizes the equipment. Some funders charge fees to cover this expense, other funders include it in their rates.

SECURITY Collateral offered by a borrower to a lender to secure a loan.

SITUATIONAL The circumstances of each customer and each vendor varies. The rules stay the same but how you go about the business of providing lease financing depends on the situation. Most common usage of the word situational is in regards to rates. The vendor wants to know what your rates are – as a broker your response is that you will get his customer the best rates he qualifies for – and that you can’t guess what the customer’s credit is like – it is situational.

SKIP PAYMENTS Payments which are not required to be made during a specified interval (e.g., the first payment may be due in 90 days, which would be a "three-month skip". (Leasing in Canada [Third Edition], Ralph Selby, FCA, Butterworths, 1999)

SMALL-TICKET LEASING Typically, financing transactions under $100,000. (Under US$100,000 in the United States - U.S. Equipment Leasing Association)

STANDBY LETTER OF CREDIT Cash and or real estate held by a bank secures this lease. Declining balance, Letter of Credit agreed to in advance, in the form of a schedule.

STRETCH LEASE An agreement whereby the lessee has the option, at the end of the primary lease term, to either extend the term of the lease or purchase the asset; should lessees choose to extend the term, they have no purchase option later; the present value of the extended rent usually equals the value of the option price. (Leasing in Canada [Third Edition], Ralph Selby, FCA, Butterworths, 1999)

SUBSTANTIATE To support with proof or evidence; verify.

TASK A request or directive to someone to engage in any activity or process that must take place in order to move forward or complete a project including; phone calls, shipments, manual notifications, process an application, signing of documents, etc.

TRADES Shorthand for Trade references. Having trade references on an application can turn a decline into an approval; it will enhance a weak application.

TRUSTEE A bank or trust company that holds title to or a security interest in leased property for the benefit of the lessee, lessor, and/or creditors of the lessor. A leveraged lease often has two trustees: an owner trustee and an indenture trustee. (U.S. Equipment Leasing Association)

UNENCUMBERED Property free and clear of all liens (creditors' secured claims).

UPGRADING The replacement of an asset with a similar but more serviceable asset, generally in an attempt to forestall or correct obsolescence. (Leasing in Canada [Third Edition], Ralph Selby, FCA, Butterworths, 1999)

VENDOR LEASING The working relationship between a financing source and a vendor to provide financing to stimulate the vendor’s sales. The financing source offers leases or conditional sales contracts to the vendor’s customers. The vendor leasing firm substitutes as the captive finance company of a manufacturers or distributor through the extension of leasing to customers, provisions for credit checking, and performance of collections and operational administration. Also known as lease asset servicing or vendor programs. (U.S. Equipment Leasing Association)

VENDOR PROFILE At first glance, a vendor profile provides the basic business coordinates. A properly completed Vendor Profile is a communication between the vendor and the funder. The vendor is an important component of lending.

VOID A blank cheque with the word VOID written prominently across it. This cheque does not need to be signed or dated. A VOID cheque must be MICR encoded and bank prepared in exactly the same name as the lessee. Hand written cheques are not acceptable. Photocopies are acceptable but a specifically obtained VOID cheque is preferred and conveys professionalism on your part.