Finance Glossary
Key terms and definitions in equipment leasing and business finance
Understanding financial terminology is essential when making leasing and financing decisions. Browse our comprehensive glossary below, and explore our equipment leasing and business financing categories for in-depth guides.
Amortization
The process of spreading loan payments over time, with each payment covering both interest and principal. Amortization schedules help borrowers understand how their balance decreases over the life of the loan.
APR (Annual Percentage Rate)
The total yearly cost of borrowing expressed as a percentage, including interest and fees. APR provides a standardized way to compare different loan and lease offers.
Capital Lease
A lease agreement where the lessee assumes the risks and benefits of ownership. Capital leases are recorded on the balance sheet as both an asset and a liability. See our guide on operating vs. capital lease differences.
Collateral
An asset pledged by a borrower to secure a loan or lease. If the borrower defaults, the lender can seize the collateral to recover losses.
Credit Score
A numerical representation of a borrower's creditworthiness, typically ranging from 300 to 850. Higher scores indicate lower risk and generally lead to better financing terms.
Debt Service Coverage Ratio (DSCR)
A financial metric measuring a company's ability to pay its debt obligations. Calculated by dividing net operating income by total debt service. Lenders typically look for a DSCR of 1.25 or higher.
Depreciation
The decrease in value of an asset over time due to wear, age, or obsolescence. Depreciation can provide significant tax benefits for equipment owners.
Down Payment
An initial upfront payment made when purchasing or leasing an asset. Down payments reduce the financed amount and may result in better terms.
Equipment Leasing
A financing arrangement where a business rents equipment for a specified period instead of purchasing it outright. This preserves capital and provides flexibility.
Fair Market Value (FMV)
The estimated price at which an asset would sell in an open market transaction between a willing buyer and seller. FMV is important in lease buyout calculations.
Fixed Rate
An interest rate that remains constant throughout the term of a loan or lease. Fixed rates provide payment predictability and protection against rate increases.
Lessee
The party who leases an asset from the owner (lessor). The lessee makes regular payments in exchange for the right to use the equipment.
Lessor
The owner of an asset who grants a lease to another party (lessee). The lessor retains ownership while receiving lease payments.
Line of Credit
A flexible financing arrangement that allows a borrower to draw funds up to a pre-approved limit. Interest is charged only on the amount used.
Operating Lease
A lease agreement where the lessor retains ownership risks. Operating leases are typically shorter-term and may not appear on the lessee's balance sheet under certain standards.
Principal
The original amount of money borrowed or the remaining balance of a loan excluding interest. Each payment typically includes both principal and interest portions.
Residual Value
The estimated value of leased equipment at the end of the lease term. Residual value directly affects monthly lease payments — higher residual values mean lower payments.
SBA Loan
A loan partially guaranteed by the Small Business Administration, offering favorable terms to qualifying small businesses. SBA loans often feature lower down payments and longer repayment terms.
Term
The length of time over which a loan or lease agreement runs. Common terms range from 12 to 84 months depending on the type of financing and asset.
Variable Rate
An interest rate that fluctuates based on market conditions or a benchmark rate. Variable rates may start lower than fixed rates but carry the risk of increasing over time.