Commercial equipment leasing and financing are financial arrangements that allow businesses to acquire necessary equipment and machinery without making a large upfront payment. These options provide businesses with the flexibility to access the tools and assets they need to operate and grow, while spreading the cost over time.

Commercial Equipment Leasing

In a commercial equipment leasing agreement, a business essentially rents the equipment from a lessor (the leasing company) for a specified period. The business pays regular lease payments, usually monthly, in exchange for the right to use the equipment. At the end of the lease term, the business typically has the option to purchase the equipment, renew the lease, or return the equipment. Leasing is often preferred when businesses want to use the equipment for a specific project, have short-term needs, or prefer to avoid the responsibility of equipment ownership.

Capital lease vs Operating Lease

Distinguish between a capital lease and an operating lease. Think of a capital lease as resembling ownership; it’s a long-term commitment where the asset appears on your balance sheet. Similar to taking out a loan for equipment purchase, you make lease payments instead. Typically, capital leases span longer terms, and you might even have the option to buy the equipment for a nominal price at the lease end.

On the other hand, an operating lease is akin to a rental agreement. You rent the equipment over a shorter duration, and it doesn’t reflect on your balance sheet. Operating leases usually don’t cover the entire useful life of the equipment; once the lease concludes, you return the equipment to the lessor. This lease type suits those seeking frequent equipment upgrades or access to the latest technology.

Types of equipment capital leases come in various structures:

Equipment financing agreement: You make fixed payments over a designated term, eventually owning the equipment outright. Similar to a loan, you pay a financing fee instead of interest. Expect slightly higher payments but no additional buyout cost at the end. Tax benefits may offset monthly payment expenses.

$1 buyout lease: Comparable to an equipment loan, you pay to rent the equipment and can purchase it for $1 at lease termination.

10% purchase upon termination (PUT) lease: At lease end, you buy the equipment for 10% of its original cost, allowing for lower monthly payments with a predetermined final purchase cost.

Equipment operating leases are structured differently:

Fair market value lease: Payments are made to use the equipment, and at lease end, you have the choice to buy the equipment at its fair market value, return it, or renew the lease. This suits equipment with rapid depreciation, like computers or gym gear.

10% option lease: You make payments and can buy the equipment for 10% of its initial value or opt out at lease end.

Terminal rental adjustment clause (TRAC) lease: Primarily for semi-trucks and vehicles, this lease allows you to purchase the vehicle for an agreed residual amount or the lender sells it to a third party. If the sale price is less than the residual amount, you owe the difference.

Equipment leasing calculation follows this formula:

((Finance Amount + Residual Value) * Money Factor)) + Monthly Depreciation + Taxes = Monthly Lease Payment

Your business’s lease payment hinges on the money factor rate, determined by the leasing entity and your business credit score. Rates typically range from 6% to 8%, although they can vary.

Commercial Equipment Financing

Equipment financing involves borrowing funds from a lender to purchase the equipment outright. The equipment itself serves as collateral for the loan, and the business repays the loan amount plus interest over a predetermined period. Unlike leasing, equipment financing results in ownership of the equipment at the end of the repayment term. This option is ideal for businesses that have a long-term need for the equipment and want to build equity in the assets over time.

Key Benefits:

• Preservation of Cash Flow: Both leasing and financing allow businesses to conserve their working capital by spreading the cost of equipment over time, freeing up funds for other business needs.

• Tax Benefits: Both options may offer tax advantages, such as deducting lease payments as operating expenses or depreciation and interest on financed equipment.

• Flexible Terms: Leasing and financing agreements can be tailored to match the business’s budget and revenue cycles, offering flexibility in payment schedules.

• Access to Up-to-Date Equipment: Leasing and financing enable businesses to stay competitive by accessing the latest equipment and technology without the need for significant upfront investment.

• Asset Management: Leasing often includes maintenance and upgrade options, and financing allows businesses to fully own the equipment and potentially build equity.

Choosing between commercial equipment leasing and financing depends on factors such as the business’s financial situation, equipment needs, long-term goals, and preferences for ownership. It’s recommended to work closely with financial professionals to determine which option aligns best with the business’s specific circumstances.

Benefits of Equipment Leasing 

1. 1. Obsolescence Management: Equipment leasing is advantageous for items at risk of becoming obsolete. Opting for a lease over a loan is prudent when considering such equipment.

   2. Cash Flow Optimization: Leasing typically exerts a lesser strain on cash flow. Payments are spread throughout the lease term, freeing up capital for other business needs like expenses or expansion.

   3. Tax Advantages: Lease payments are tax-deductible expenses. In the case of capital leases, businesses can also deduct equipment depreciation. Operational leases allow depreciation deduction if the equipment is purchased at lease end.

   4. 100% Financing: Unlike equipment loans necessitating a down payment, many leases offer full financing without any upfront payment.

   5. Debt-Free Balance Sheet: Opting for an operational lease keeps it off the balance sheet, offering more flexibility to secure other types of business financing concurrently.