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Glossary
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Founder & Editor · Expertise: Equipment financing, Lender matching, Loan and lease structure
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Methodology
Sources: partner-lender program data + industry research Editorial standards: methodology Disclosures: advertising + lender relationships

FMV

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Definition

FMV is The price equipment would sell for in an arms-length transaction; in leasing, the residual price to buy out an FMV lease.

Fair Market Value (FMV) is the price at which equipment would change hands between a willing buyer and a willing seller, neither under compulsion to buy or sell, both having reasonable knowledge of relevant facts.

FMV in equipment leasing

An FMV lease is a lease structure where the lessee can buy out the equipment at term-end for its then-current fair market value (typically 15-25% of the original purchase price, depending on the equipment type and condition).

FMV leases have the lowest monthly payment of any structure because the residual is large. They are also operating leases (for accounting purposes under ASC 842) and may be off-balance-sheet for smaller lessees.

FMV lease vs $1 buyout lease

A $1 buyout lease has a $1 residual at term-end (you own the equipment for $1). It looks like a loan economically and is treated as a finance lease under ASC 842 (on balance sheet). The monthly payment is higher than FMV, but you own the equipment outright at term-end.

How FMV is determined

Lessors use a combination of: industry valuation databases (NADA Equipment Guide, Iron Solutions, Mascus), auction-result aggregators (Ritchie Bros.), age-adjusted percent-of-original-cost tables, and physical inspection at term-end.

FMV in collateral underwriting

FMV also matters at the start of a loan: lenders limit the loan-to-value (LTV) ratio based on FMV, especially for used equipment.

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Editorial review by Ed Stapleton Jr. · Founder & Editor

Related terms

What this means in practice

Why borrowers need to understand FMV

FMV appears in funding documents, application materials, lender disclosures, and ongoing servicing communications. Knowing the term in concept lets you read those documents with comprehension instead of skimming past.

The practical answer to "why does this matter" depends on where you are in the process. Application stage: it affects how the deal is structured. Funding stage: it appears as specific contractual language. Servicing stage: it governs how borrower and lender interact through the term.

The three places this term appears

This term has both a general definition and a lender-specific application. The general definition is what is above. The lender-specific application is what shows up in your particular transaction documents, and that is where the contractual implications live.

Treat the general definition as the starting point and the funding documents as the controlling text. Where the two differ, the documents win.

Misreadings to avoid

The recurring mistake on this term is borrowers acting on the general definition without checking the lender-specific implementation in their documents. The general definition is right; the implementation is where the borrower obligations actually live. Read both.

Timeline expectations

What actually happens day-by-day, from application to equipment in service. Most buyers underestimate one or two of these steps; knowing them up front prevents surprises.

Insurance binder issuance
Same-day to 24 hours
Commercial auto and equipment insurance binders typically issue same-day from existing carriers. New policies for new businesses can run 2-5 business days to bind.
Decision to document signing
1 to 3 business days
Borrower review and signing of credit documents and personal guarantee. Most delays here are borrower-side rather than lender-side.
Application submission to decision
24 hours to 5 business days
App-only programs decision same-day or next-day. Full-financials programs run 3-5 business days as the file moves through credit, then operations.
Placed-in-service date documentation
Same-day as commissioning
For Section 179 and depreciation purposes, the placed-in-service date is when the equipment is delivered, installed, and operationally ready. Document this date carefully for tax purposes.
Title transfer on titled equipment
1 to 4 weeks
Title transfer through state DMV adds weeks to closing on titled equipment. Out-of-state transfers run on the longer end. Title escrow accelerates this in many cases.
Lease end-of-term decision deadline
60 to 90 days before term end
Most lease structures require notice of intent (purchase, return, or renew) 60-90 days before term end. Missing the deadline can trigger automatic renewal or other default consequences.

Cost stack: what total ownership actually includes

The equipment purchase price is one line on the financed amount. The actual cost of ownership over the life of a fmv deal includes the items below. Buyers who only budget for the purchase price often hit cash-flow surprise within the first 12 months.

  • Late payment fees and penalties. Late fees of 5 to 10 percent of payment if more than 10 days late. Default interest of 4 to 6 points may apply. Worth knowing before signing.
  • Equipment purchase price. Base equipment price as quoted by the dealer. Negotiable, especially on used equipment and end-of-quarter new equipment.
  • Software licenses. CAM, design, control, and operational software. Often subscription-based with annual renewal. Can run $5,000 to $50,000+ per seat depending on equipment category.
  • Storage and security infrastructure. Indoor storage, security systems, and theft-prevention measures. Particularly important for landscape, construction, and small equipment frequently stored outdoors and at job sites.
  • Operating consumables. Recurring costs not included in the equipment purchase: fuel, fluids, filters, tools, parts. Equipment-specific.
  • Personal property tax (where applicable). Annual personal property tax assessed by counties in many states. Runs 0.5 to 3 percent of assessed value annually.
  • Pre-payment penalties. Standard early-payoff penalty: 3 percent of payoff in year one declining to zero by year three. Or flat fee of $500 to $2,000. Varies by lender.
  • End-of-term residual or buyout. Lease structures: fair market value buyout at term end (FMV lease) or stated residual amount (TRAC lease). Loan/EFA structures: $1 buyout or no buyout. Plan for this from day one on lease structures.

What if something changes mid-term

Equipment loans run for 36 to 96 months. Things change. The patterns below cover the situations that come up most often during the loan term and how they typically resolve.

Borrower discovers equipment was misrepresented at sale

The lender funded based on the bill of sale, not the equipment condition. Disputes between buyer and seller after funding are between those parties. The loan obligation continues regardless. Independent pre-purchase inspection prevents most of these situations.

Equipment damage during the loan term

Insurance proceeds pay off the loan balance or fund replacement equipment with lender consent. The loan does not cancel automatically with the equipment loss; coordination with lender is required.

Lender becomes difficult to work with

Most equipment loans are assumable or assignable with lender consent. Refinancing to a different lender is the more common path. Document the issues clearly; the situation rarely improves and the alternatives exist.

Personal guarantee called on default

Personal guarantee makes the principal personally liable for the debt if the business defaults. Working with the lender on workout or restructure is the preferable path. Personal bankruptcy is a real consequence of unresolved default with personal guarantee.

Authoritative sources

The rate ranges, structures, and program details on this page are informed by our partner-lender book and the public industry resources below. We link out so you can verify any specific claim or go deeper.

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Reviewed by

Ed Stapleton Jr.

Founder & Editor

Ed Stapleton Jr. runs Fund My Equipment. Every page on this site is written and reviewed by Ed.

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