Equipment Leasing Definition
Equipment leasing is the type of financing in which the small business owner rents the equipment rather than purchasing it.
Business owners lease expensive equipment such as machinery, vehicles, computers, and other tools needed to run a business.
It also, the equipment lease for the specific period. Once the contract up, the business owner must return the equipment, renew the lease and buy the equipment.
And equipment leasing is different from equipment financing – taking out the business loan to purchase.
And also, equipment and paying it off over the fixed term with the equipment as collateral. In that case, we own the equipment once we pay off the loan.
With the equipment lease, the equipment is not ours to keep once the leasing term is over, as with the business loan.
We pay interest and fees when leasing equipment and they add into the regular monthly payment. There might be extra fees for insurance, maintenance, repairs, and related costs.
And equipment leasing is much extra expensive in the long term than purchasing equipment outright.
But for cash-strapped small business owners, it means to access necessary equipment without much upfront money.
How does the Equipment Lease Work?
- If we decide to lease equipment for our business rather than purchase it, we enter the lease agreement with the equipment owner and vendor.
- It’s similar to how the rental agreement works. The equipment owner drafts a contract, laying out how long we all lease the equipment and how much it pays each month.
- During the lease term, we use the equipment until the deal expires. There are cases in which we can break the lease. And these instances must spell out in the contract – but many leases are noncancelable.
- Once the lease is up, we often take the option to purchase the equipment at the current market rate and lower, depending on the vendor.
- The rates we pay to lease the equipment vary from one leasing company to the next. Our credit score also plays a role in the rates we quoted.
- The riskier we are to lend to, the costlier it will be for us to lease equipment. And leasing companies tend to specialize in specific industries.
- So it’s essential to do your homework to find the right vendor for our business. Equipment leasing terms typically for three, seven, and ten years, depending on the equipment type.
- And equipment leasing is not a loan, which means it won’t show up on our credit report and hurt our ability to borrow.
- In many cases, the IRS lets us deduct our equipment lease payments if we use the leased equipment for your business.
- And talk to the tax advisor if the tax deduction is a driving factor in your decision to lease the equipment. The IRS denies the deductions if it views the lease as an installment sale.
What are the Benefits of Equipment Leasing?
- Many lessons don’t require a significant down payment.
- And if we need to update equipment continually, leasing an excellent option because you aren’t stuck with obsolete equipment.
- If we need to upgrade to more advanced equipment to handle a higher volume of work, you can do so without selling our existing machinery and shop for replacements.
- And equipment leases are often eligible for tax credits. It depends on the lease. We were able to deduct our payments as the business expense by taking advantage of Section 179 Qualified Financing.