5 Smart Tips for Adding A New Truck to Your Fleet

If you are a business owner, you will know that with the expansion of your business, comes the need to add more assets to your operations. If you are running a fleet, no matter how big or small, this is most certainly the case. 

The fact of the matter is that in order to remain competitive and continue growing, you will need to keep adding trucks and vehicles to your business. But, this naturally does come at a cost for your business. 

Despite the global fleet industry’s value exceeding $15 billion in 2019, the industry, in general, is seeing a dip in profits. Not only are companies focussing more on operational efficiency, but the COVID-19 pandemic which has swept the globe has had huge effects on the fleet and trucking industry. In fact, the industry is seeing a 58% reduction in overall drive time, which will have a large impact on the global market. 

With this in mind, the importance of growing your fleet, and your business cannot be undermined. So, we thought we would take a look at ways for you to add new trucks to your fleet, what the truck financing requirements are and how you can work out the best truck financing rates for your business. 

Pre-Plan Your Fleet Strategy

The first thing you need to look at before going out and making a large purchase is your company’s financial standing, the growth trajectory, and the strategy for the next one to five years. Adding a truck, or several more trucks to your fleet can be a huge cost to your company, so you will need to weigh up the pros and cons before you simply jump in. 

One of the first things to consider is the risk appetite of your company. Working together with your accountant is key at this point to establish the financial stability of the organization, as well as how much leeway you have in economic instability. 

Consider, for a moment, the impact that COVID-19 had on businesses globally. It was a sudden, and unexpected downturn that wreaked havoc on an organization’s working capital. Companies found themselves in a position where their highly reduced working capital had to keep the company afloat for longer and had to carry more expenses than usual. 

Next, consider your strategic trajectory and your company’s goals for the next 6 months, year, and five years. What are you aiming to achieve? Are you looking to branch out into other avenues of business? Or are you looking to expand your fleet to different parts of the country? This will give you an indication of what kind of vehicles, and how many you should be adding to your fleet over a period of time. 

Lastly, consider the energy efficiency of the vehicles that you are choosing. Not only is there a general trend toward going green, but choosing the correct vehicle can also save you thousands in the long run. Not only can maintenance be cheaper on more efficient trucks, but you can end up spending less on fuel. 

Consider Your Purchasing Options

The next thing to look at is what options you have when it comes to actually acquiring the truck. The first option that you have is to buy the truck outright with cash and be the sole owner of the vehicle. This naturally comes with its perks and benefits as you do own the vehicle and it can be cheaper than truck financing in the long run. 

For small businesses and cash-strapped companies, however, this could be impossible. Trucks and equipment usually come with a big price tag, and in a lot of cases, a company just simply does not have the capital available for a massive cash purchase. Even in the case of larger organizations, a financial advisor will usually advise against a large cash purchase like this due to the risks involved. 

As we mentioned earlier, COVID-19 was a prime example of how a company’s cash-flow can be impacted suddenly and devastatingly. Your working cash-flow will need to be set aside for day-to-day expenses like rent and staff wages. 

So, what is the alternative you may ask? Leasing is one of the most popular and viable options for companies to acquire new trucks and equipment for their business, without the huge initial outlay of cash. 

Truck financing comes with several benefits too, depending on the type of lease you opt for. There are generally two different types of leases; a capital lease and an operating lease. A capital lease is a contract that allows a company to pay monthly installments to the lessor for the use of equipment, with a residual amount attached at the end of the period. Once this has been paid, the lessee becomes the owner of the truck. 

In an operating lease’s case, there is no residual, and the lessee never actually owns the truck. They can choose to re-lease it or give it back at the end of the period. In these cases, companies can easily upgrade their trucks and ensure that they have the most modern and top-of-the-range vehicles in their fleet as they can simply sign a new lease for a new truck. 

Work Out The Benefits For Your Finances

Truck financing has varying impacts on your financial statements, cash-flow statements, and your taxes. It is important to know, especially if you are a start-up company just what each entails.  

If you have bought the truck in cash, you will need to record it differently than if you have leased it. A cash purchase will be recorded as an asset on your financial statement and will be recorded as a debit and credit of the same amount. 

However, because you own the vehicle, and because this will be producing an income for your company, you will also need to record the depreciation of the asset. Vehicles and trucks are usually given a five-year lifespan, so you can divide your purchasing price by five and list that as your depreciation amount. 

Leases are recorded differently, especially in the case of an operating lease. Because you will not own the vehicle, it will not be conveyed on the balance sheet and will not be considered a company asset. Think of it similar to rent. Operating leases are considered expenses on the financial statements and are expensed on the income statement. This, in turn, impacts both the net income as well as the operating income of the business. 

Operating leases are also considered tax-deductible as “ordinary and necessary” business expenses, and can be written off to tax. Because it is not considered a debt, and because you are not reporting the depreciation, your truck can be written off to debt. Speak to a knowledgeable tax consultant for further advice, as you can also write the interest off, thus not spending too much on your truck. 

The last thing that you need to consider about acquiring a truck is how it will appear on your books to other creditors and investors. Usually, if you have signed an operating lease, or own the truck, it will appear on your balance sheets as an asset. This could discourage other creditors from giving you further lines of credit. Operating leases are also more welcomed by investors due to the fact that you have included integral equipment as an operating expense. 

Take Other Costs Into Consideration 

Whether you are leasing or buying outright, you will need to keep in mind the other costs that come with acquiring a new truck. Costs like insurance, maintenance, licensing, and transport and fuel need to be considered in the planning stages of the acquisition. 

If you are purchasing the truck yourself and owning it, you will need to cover all of these costs yourself. When it comes to maintenance, there are a number of maintenance plans that you can sign up for to ensure that your truck receives regular serving and maintenance to extend its lifetime. 

With leasing, this can be even easier. In the case of an operating lease, the lessor will be primarily responsible for the continued maintenance of the vehicle. Whether it is preventive maintenance or regular servicing, this will usually be included in the lease contract. 

Capital leases might differ in this, so make sure you check your lease carefully. In some cases, the lessor might include a maintenance plan in the contract, while others might leave it up to you to do. They will only take responsibility for it, however, while they still own the rights to the equipment, so make sure you have a plan for the end of the lease and for when the equipment becomes yours. 

Find the Right Financing Partner

When it comes to truck financing, having the right financing company is key for the smooth running of the leasing period. Lessors have very little risk when it comes to leasing equipment and vehicles to companies as they use it as collateral. So, if the lessee starts defaulting on their payments, the lessor can simply take back the truck. 

The leasing process is also usually somewhat simple, and to-the-point. Credit checks are usually done, but are not critical, which is good news for a small business or start-up which has little to no credit history. Applications can take a few hours to a day or two to be approved, and the lessee can receive their new truck within a short period of time.

It is important, however, to make sure that you get the right company on your side if you are leasing. This company will be entering a financial contract with you and will need to be as transparent and accountable as possible to ensure that your money is being spent effectively.

It is highly advisable to find a financing partner who will treat you as a financial partner. Having a company whose staff has years of experience in the industry and who are experts in the field will be a huge advantage to you. If they are also keeping up with market trends and fluctuations, they will be able to advise you correctly and be able to guide you away from the pitfalls and risks of a lease. 

Lastly, make sure you find a lessor who is flexible. There are a number of terms on the contract that can be altered to suit your unique needs. The duration of the contract, interest rates, the residual amount, and added costs and fees can all be negotiated and worked out. So, find the right company who will work with you, and you won’t look back on the lease. 

Wrapping Up 

When expanding your business, it is integral to consider all aspects of adding new equipment, vehicles, and cost-heavy expenses to your business. From the risks that come with the truck to your financial stability, to the financing partner, ensuring all elements are carefully mapped out will ensure your stability throughout the use of the truck. For a financing partner, you can trust, make sure you do your research, and only choose reputable and respected companies like Equipment Finance Canada for your financing needs.


Equipment Financing for New Businesses

Kicking off a new business can be an exciting yet daunting task. Some of the biggest challenges for new businesses are the start-up costs and getting enough capital together to get the business off the ground. A key expense in a business is the equipment that actually allows the business to function. 

Equipment makes up the top three biggest costs in the business, the other two being manpower and rent. Depending on what business you are starting, equipment can take up at least 56% of your startup costs. Hospitality and restaurants, construction, and fleet make up some of the most expensive businesses to kick-off, with technology start-ups being a bit lighter on the pocket than these industries. 

So, what do you need to know about equipment financing, and how can you work it into your strategic plan? We broke down how you can go about finding the right solutions for your equipment, which options would work best for your company, and the advantages and pitfalls to watch out for when acquiring new equipment. In particular, we are going to be unpacking equipment leasing and how it can benefit your company. 

Take Your Finances Into Consideration

The first thing you are guaranteed to look at is just how much you have to spend on equipment. Being a new business or start-up, your capital is most likely going to be somewhat limited for large purchases. The working capital that you do have in hand should be used for day-to-day operational costs like your rent and wages and in case of unexpected expenses and drops in initial cash-flow. 

Take into consideration the impact that COVID-19 had on businesses globally. Many businesses did not have enough working capital in reserve for the halt in income. This meant that their day-to-day expenses could not be met and excessive lay-offs were seen, while hundreds of thousands more shut their doors entirely. 

Leasing allows you the option to not use this vital working capital for large expenses like equipment. It provides you the opportunity to work it in as monthly payments for a duration of time that are manageable and less financially risky to the business. 

Do You Have A Credit History?

If you are looking at asking for credit from a financial institution, one of the things to keep in mind is your credit history. Due to the fact that you are a new business, the business is not expected to have a credit history that financial institutions can refer to to provide you credit. Leasing companies are less stringent when it comes to that. 

Because they use the equipment as collateral, they are more likely to sign a contract with a new start-up business. Should the company default on the payment, they simply need to take the equipment back. This means less risk for them as lessors, but as a lessee, you will still need to continue honoring the contract. 

Leasing companies are also more likely to take the business owner’s credit history into consideration when signing the contracts. This provides more security for the lease for both parties, and can also lower the interest rates of the monthly lease payments. Remember, the more risk you are, the higher the interest you are likely to pay. 

Work Out Your Options 

The next thing to look at is what actual equipment financing options you have available to you. Much of this will be determined by what kind of equipment you will be needing. If you are looking for equipment with a long lifespan, you will be looking at a totally different option than you would be for equipment that becomes redundant quickly. If you would also like to eventually own the equipment, there are also options in leasing for that. 

Let’s look at an example. Things like printers and laptops are office equipment with a useful lifetime of around two years. After that, they start to become redundant as technology evolves and more sophisticated and useful versions are launched. Buying this equipment will, in the long run, simply cost you more as you will be replacing the equipment frequently. You will also have to dispose of the equipment correctly, which can also be a cost burden to you. 

In these cases, operating leases could be your best option. An operating lease is a contract in which a lessor provides the lessee equipment at a monthly rate for a set duration of time, after which, the equipment is returned. The lessee can choose to upgrade at the end of the term, cancel the contract completely, or, if need be, re-lease the equipment. 

A capital lease, on the other hand, is more suited for equipment with a longer lifetime value. These leases usually come with a residual, or in some cases, a $1 buy-out in which the lessee can take over ownership of the equipment. This is one of the less risky, and most affordable way to eventually own the equipment you need to operate your business. 

What Extra Costs Can You Afford?

When it comes to equipment, you need to take other costs into consideration, further than just the overall outlay of what it will cost. Equipment will come with a plethora of extra costs that you need to take into consideration when signing a lease. Take maintenance, insurance, licensing fees, transport fees, import fees, and even training into consideration. These are all associated costs that come with the purchase of equipment. 

Equipment financing can take some of those risks off you. In operating leases especially, where the lessor will always own the rights to the equipment, these costs will be factored into the lease and covered by them. 

Think back to that printer, for example. The leasing company will be responsible for the regular maintenance and repairs of the printer, as well as the insurance of the equipment. The lease will include the leasing company delivering the equipment and providing a consultant to train your staff on how to use the new printer. 

It might differ in capital leases, however. Because you, as a lessee will eventually be owning the equipment, you could be responsible for these costs. The insurance and maintenance will most likely be your responsibility throughout the duration of the term. However, if you can, you could potentially negotiate them to be included in the terms for a period of time. Leases with maintenance plans added on is the optimal equipment financing option for most companies looking to acquire equipment. 

How Will It Impact Your Books?

This is a key aspect of equipment financing and choosing the right option for your business. If you purchase new equipment cash, you will be reporting it differently on your financial statements than if you are financing it. 

Cash purchases are recorded as an asset on your financial statement and will be recorded as a debit and credit of the same amount. But, because you are the sole owner of the equipment, and it will be generating an income for your company, you will need to take the depreciation of the equipment into consideration. Say, for example, you are purchasing a truck with cash to start your fleet management business. Vehicles and trucks have a five-year lifespan; so divide your purchasing amount by five and include that on your financial statements as your depreciation amount

Leases are completely different and will have less impact on your balance sheet. Operating leases, in particular, are less risky. Because you will not be owning the equipment, it will not be recorded as an asset. It will rather be recorded as a business expense on the financial statement and expensed on the income statement. So, think of a lease as rent, which is recorded similarly. You will not need to take the depreciation of the equipment into consideration either and impacts both the net income as well as the operating income of the business.

Think of Taxation and Future Financing 

Leasing comes with extraordinary tax benefits. Because they are recorded as expenses to the company, you can claim back from tax for your equipment financing. Operating leases, in particular, are recorded as “ordinary and necessary” business expenses, and can be written off to tax. 

Because an operating lease is not recorded as an asset and because it is a debt for the business, that debt is fully tax-deductible. If you go further, the interest on your lease can also be written off. So, before you simply jump into a lease agreement, get some advice from a tax consultant and work out the best agreement with the lessor. You might find that most of the financing for your equipment can be written off. 

Lastly, consider the ramifications of new equipment when it comes to investors and future lines of credit. Remember, credit providers and investors will be looking at your financial statements to determine your risk and creditworthiness. Leasing allows more room for future credit lines in the future. Investors will also determine that the monthly expense of equipment is less risky for them and will most likely be more open to investing in you. 

Last Thoughts

The last thing you should take into consideration for your new business is who you choose as your equipment financing company. Because the equipment is going to play a large role in your business continuity, as well as be a long-term expense for you, you will want a company that will work together with you. Financing companies need to be considered partners rather than just lessors. You will want them to take your unique business needs into consideration, ad structure a deal that suits you. 

They will also need to be reputable and experts in their industry and be able to advise you on any pitfalls and challenges that you might come across. Knowing the trends and fluctuations in the market will also be important as they might pose a risk for you, so get someone on your side to make sure you make the right financial decision for your business. 


Why Your Construction Business Should Consider Equipment Financing

2020 has been quite a year. With the global spread of the COVID-19 pandemic and far-reaching lockdowns, businesses all over the world have had a tough time trying to keep their doors open. One industry that has taken a particularly hard hit has been the construction industry. Projects have had to be put on hold, timelines extended and reduced crews have crippled companies all over the world.

It is projected that the industry has declined from around USD11,217.4 billion at the end of 2019 to USD10,566.8 billion in 2020. With that being said though, recovery is expected to push the industry beyond the initial expectations.

So, even with the current economic difficulties construction companies face, there is a new wave of business expected. If you are a business owner of a construction company, you will naturally want to ensure that you are part of the wave, despite the economic downturn.  

One of the most cost-heavy aspects of a business is equipment. Without this vital element, however, there is, unfortunately, no business and no operation. We thought we would unpack a possible solution to get you back into action: construction equipment financing. We took a look at what your options are and why it could be incredibly beneficial to your business. Let’s jump straight in.

What is Equipment Financing?  

Equipment financing, especially construction equipment financing, refers to the types of businesses that provide construction companies with the needed capital to purchase the necessary equipment to keep their business running. 

You can opt to go through a bank, a financial institution, or directly from an equipment company that will lease equipment to you. Leases are one of the most popular types of financing options as they provide the company with flexible and realistic options to acquire the equipment needed. 

Construction companies, in particular, choose to finance the heavy machinery and tools, as well as the trucking and vehicles needed to complete projects. They can also take out operating leases for the much-needed office equipment like computers and printers to run the admin side of the business. 

So, what are the benefits of financing equipment, and why would a company opt for this option, even if they have the capital available to buy equipment cash? We broke down the top reasons why financing, especially leasing, is incredibly beneficial to a company and why we recommend this option for business continuity. 

Leasing Preserves Your Working Capital

The first, very crucial aspect of financing and leasing is the fact that you do not need to set aside a huge lump sum of money to acquire the equipment that you need. The total cost of the equipment is broken down into manageable, monthly payments for the company to pay off. 

Naturally, interest and associated fees are added to the total cost, but it makes owning the equipment a lot more achievable. 

It is highly recommended by financial advisors not to take big chunks out of your working capital for things like equipment. This capital is needed for the day-to-day expenses of the organization like wages and rent. Should the company be hit with a sudden, and unexpected downturn, like COVID-19, for example, this available cash could be the saving grace to keeping the company running. 

Lease payments can be financially matched to the equipment’s productivity and financially speaking, offer less of a risk to the company. 

Equipment Redundancy is Not a Factor

We can all agree that technology is evolving at a very rapid rate. Equipment that has been purchased two years ago might not be relevant or might already be outdated. Take a look at laptops, cell phones, and printers, for instance. This type of equipment has short life-cycles and will need to be replaced often for staff to remain productive and be able to keep up with technological developments. 

Construction equipment is changing all the time. Tools are becoming smarter and making sure that the project can be completed with more accuracy, more efficiently, effectively and in less time with up-to-date equipment. 

Not only can equipment become obsolete after a few years but companies can maintain their competitive advantage over other companies with the latest equipment. Many of them boast the latest tools and technology as a sales point to win over customers. 

It is important, however, to know the difference in leases. Capital leases usually result in the company taking over the equipment and owning it at the end of the term. Operating leases, on the other hand, are the forms of financing where you can choose to return the equipment, lease a newer model, or re-lease the equipment for another period of time. 

It Makes Sense On Your Books 

Financially speaking, leasing is completely advantageous for a business. Leases are not recorded like normal equipment purchases and do not really impact the companies balance sheet, which is especially true in the case of operating leases. Because the company will be giving the equipment back to the lessor at the end of the term, the lease is recorded as a working expense and the company does not need to report the depreciation of the equipment. 

In the case of owning equipment, it would be listed as a depreciating asset and is listed on the balance sheet at its historical cost amount. This is then reduced by accumulated depreciation to result in the net book value. Should the company choose to sell the equipment, it triggers a gain or a loss, depending on the difference between the equipment’s net book value and its sale price.

Leases, on the other hand, are recorded as liabilities and open the company up for more lines of credit from banks as well as investments. Because they present less of a risk than owning assets and are reduced monthly expenses, the lessee can seek other forms of financing without too much trouble. 

Day-to-Day Equipment Management Is Reduced

When purchasing equipment, you take on all responsibility for the equipment. You will need to take care of the day-to-day maintenance and servicing of the equipment as well as ensure that the equipment is insured. 

When you opt for the construction equipment financing option, those responsibilities are up to the owner of the equipment, the lessor. In most cases, regular maintenance and breakdown costs will be factored into the leasing amount and be a part of the monthly fee. But the lessor will need to take responsibility for it being completed. 

A number of other costs can also be factored into the leasing fee and will not need to be completed by the lessee. 

Training, for example, can be factored in. Should the staff of the lessee company need training on the equipment, this can be factored into the costs, and be done by the lessor. Other costs like transporting, installing, import fees, licensing, and legal fees will all be factored into the lease costs. 

There Are Great Tax Benefits

As with your financial statements, leasing has numerous tax benefits. In most cases with leases, because of how they are reported on financial statements, you can actually claim back a significant amount from tax. 

Lessees can firstly take advantage of capital allowances, but can also cover interest costs, client upgrades, reduce taxes on defaulting clients, and deduct maintenance costs. Even with the latest tightening of the leasing regulations in IFRS 16, lessees can actually walk away smiling. 

But, just what does this mean? First of all, capital allowances allow you to deduct a percentage of the costs of the equipment from your profits on an annual basis. Capital allowances are applied in most cases with the purchase and financing of equipment. However, it might not be relevant in the case of an operating lease, but more so for a capital lease. 

You can also claim back for interest paid on the equipment and in many cases, make back a substantial amount spent on the actual lease of the equipment. 

Leasing Options are Flexible and Are A Great Option for Startups

Equipment leases are actually incredibly easy to apply for. They usually take a few hours to a few days to apply and get approved for. In most cases, leasing companies lease their own equipment and use it as collateral in case of any defaulting. Even financing companies who assist in financing the leases consider the equipment capital and are more willing to offer finance solutions. 

This is therefore ideal for startups and new businesses, who are the most likely to need a lease to get the business started. Most leasing companies do not take the company’s credit history into consideration, especially if they are a new company. If the company is signing a capital lease, with intent to buy at the end of the term, the lease will most likely require a deposit, and the financing company might take the owners’ and directors’ credit histories into consideration. 

You can usually negotiate various terms of the lease like the duration, deposit, maintenance and residual value at the end of the term. You can also negotiate the interest rates in most cases, but make sure you speak to a tax consultant in order to find the right interest rate to write off to tax. 

Wrapping Up 

There are a number of companies who you can approach for construction equipment financing, so it is important to do your research before settling on one. Make sure they are reliable, transparent and have a good history with clients. A great financing company should act as your partner throughout the process. Make sure you book a consultation with the company and provide them with a breakdown of your financial history as well as goals and strategic directory. The right company will work hand-in-hand with you, considering trends and risks in the market to provide the right financial solution.


5 Reasons Why Companies Prefer Operating Leases

Businesses today face a different set of challenges compared to businesses operating a few decades ago. Not only are they facing more competition, but they are operating in tumultuous economic conditions. This has been especially apparent in 2020 with the spread of the global pandemic around the world. COVID-19 has not only crippled millions of companies world-wide but has brought industries to their knees. 

Business continuity is extremely tough in this type of economic climate, with business expansion being even trickier for most companies. Equipment is vital for companies to function, however, it is incredibly expensive to acquire, repair, or replace. It can be extremely difficult for companies to get the right equipment to scale their business operations as well as remain ahead of the competition. 

Luckily for many businesses globally, equipment financing solutions can be offered to companies to assist with the acquisition of the equipment. Some of the most popular come in the form of leases. These are straightforward ways of acquiring the hard assets you need to continue your business operations. They are also very popular and useful for small businesses and start-ups. 

We took a look at leases, and in particular, operating leases, and unpacked why businesses prefer to choose them. So, if you are looking for a financing solution to suit your needs, here are five reasons to choose a lease. 

What is an Operating Lease?

An operating lease is a form of financing offered to businesses that allows them to acquire necessary equipment without buying it. The cost of the equipment is rather spread out and paid in monthly installments until the end of the term when the equipment is usually returned to the lessor. 

Companies can choose from a number of different leasing options, the two most popular being finance or capital leases, and the other being operating leases. Operating leases differ quite significantly from capital leases, and are usually used when the lessee is not interested in actually owning the equipment. 

Essentially, a capital lease will end in the lessee taking over the ownership of the equipment at the end of the term, after paying a residual sum. In an operating lease agreement, however, the lessee will either return or re-lease the equipment from the lessor, depending on what their specific needs are. 

Operating leases come with numerous benefits that organizations like to take advantage of. We took a look at why certain companies would opt for this type of lease over a capital lease and how it can work in their favor. 

Operating Leases Mitigate Equipment Redundancy 

Most operating leases are there for companies to make use of the latest products in equipment and technology but without the price tag. With technology evolving as quickly as it is, equipment can become redundant after only a few months to years, with new, more evolved versions being released. 

Businesses don’t really want to keep spending thousands on replacing equipment repeatedly over a number of years and opt for monthly payments on the latest technology. 

Let’s take a look at a practical example. Office equipment like printers and laptops is the kind of technology that you would sign an operating lease for. These usually age rapidly, with newer, more advanced versions being released annually or every two years. Lessees can sign for a duration of time that allows them to use the equipment for the greater part of the equipment’s useable lifecycle, and return it once a new and more updated version is released. 

This allows the company to remain competitive in the market. By being able to constantly update their equipment, they are able to make use of cutting edge technology in the field and keep their products and services updated. It also reduces the amount of equipment wastage and disposal by businesses. Leases allow equipment to be returned, usually to the manufacturer, and it can be recycled properly. 

Operating Leases Are Less Financially Risky

Businesses, especially small businesses, and startups benefit greatly from operating leases due to their low-risk impact on the organization. Without the leasing option, companies would have to delve into their working capital to purchase equipment, which is usually a large lump sum. 

Smart financial advisors usually guide businesses away from using working capital to make large purchases. These funds need to be used for day-to-day expenses like wages, rent, and operational costs. Should you dip into these funds, you could be putting your company at risk, especially hitting unexpected financial misfortunes. COVID-19 is a perfect example of this. The pandemic hit unexpecting companies, crippling their income. Companies need to rely on their working capital to be able to float the company during these times, but if you have allocated a large portion of this to equipment, you could find yourself in trouble. 

It is, therefore, more advisable to spread the costs of price-heavy equipment over a number of months that take the impact of the full expense at once. This will allow the business to continue to operate and expand while using the vital equipment. 

An Operating Lease is All-Encompassing 

The third reason why businesses prefer to sign an operating lease is due to the fact that all of the associated costs of equipment will be included in the lease. As an owner of the equipment, you are signing over the responsibility of the equipment solely onto you. 

Costs like maintenance, insurance, operating fees and, licenses, and associated travel is something that the owner will need to cover. In the case of an operating lease, the lessor will retain ownership rights of the equipment throughout the term and will be responsible for all costs that come with the equipment. These costs will simply be factored into the monthly lease fee, but it will be up to the lessor to determine these costs at the beginning of the term. 

Consider the case given earlier. Should a company be leasing a printer from a lessor, the lessor will be responsible for the regular maintenance and repair of the printer while it is in possession of the lessee. The lessor company will usually have specialist technicians to work on the equipment and will send them to complete the work on the equipment. 

In many cases, especially for highly technical equipment, the lessor will need to factor in training the lessee company on how to use the equipment. These costs will be included in the overall monthly leasing fee and continued support and troubleshooting are usually covered during the duration of the lease. 

It Makes Financial Sense

Financially, operating leases are great for the books, for future credit, and for future investment. It also has some great tax benefits for the company. 

Operating leases allow a company to make use of an asset, without the financial ramifications of it. Because the equipment will never be owned by the company, this will not be conveyed on the balance sheet. In most cases, when owning and using equipment, businesses need to report assets, liabilities, as well as the depreciation of the equipment. This is not the case when using an operating lease.

Much like rent, operating leases are considered expenses on the financial statements and are expensed on the income statement. This, in turn, impacts both the net income as well as the operating income. 

This, in turn, will impact how future creditors and investors view the company’s financial position. Due to the fact that the functional equipment is not listed as an asset, this will open up the company to future credit streams and financing due to the low risk of the company. Investors also respond well to leases on the financial statements. It shows that the company can live up to monthly financial obligations as well as continue business operations and expansion. 

Lastly, operating leases are great for tax benefits. Because an operating lease is considered tax-deductible as “ordinary and necessary” business expenses, it can be written off to tax. 

Because a lease is short term, it is not considered a debt, and because you don’t need to consider the depreciation of a lease, it is 100% tax-deductible. You will also be able to write off the interest of the lease as this is tax-deductible. 

In essence, you will be able to get most of your monthly payments back from taxes, so speak to a qualified and experienced tax practitioner to assist you with the process. They will be able to help you structure a deal that provides you with as much kickback as possible. 

Operating Leases Are Flexible and Easy to Acquire 

Operating leases are notoriously popular among small businesses due to the fact that they are simple, flexible and approval rates are incredibly high. 

In most cases, buying equipment for a start-up is not only difficult due to the fact that the costs are so high, but also due to the lack of credit history. Getting approved for an operating lease is a lot easier, and more lessors are open to new business due to the fact that they use the equipment as collateral. Should the lessee default on payments, the lessor will simply take back the equipment into their own possession, impose penalties and end the lease. 

Should the business not have a credit score, the lessee will also take the credit score of the owners into consideration, but this is not a frequent practice. Leasing companies prefer to partner with their clients, so should the company be high risk, various fees and potential penalties will be factored into the lease. 

Lessees also prefer operating leases due to their flexibility. It is commonplace for the lessee to be able to negotiate some of the terms and conditions of the lease. Whether it be duration, interest rate, associated costs, or even a deposit, lessors are usually eager to help finance the equipment. 

Leases are also usually easy to apply for and to be approved. The process is usually incredibly simple and approval takes from a few hours to a few days to process and go through. This means that companies can take delivery of their equipment swiftly and continue working as usual. 

Wrapping Up 

 In closing, we highly recommend operating leases should you be looking to build and grow your organization, especially if you are operating on a budget. Not only can it work out financially for you, but you can remain competitive, and continue scaling your business, even during a financial downturn. It is advisable to do thorough research on your financing company and shop around to find the one that fits your company’s unique needs. 

As mentioned previously, a good financing company will consider you a partner and will spend time getting to know your company, your needs, and your unique financial position. They should be in a position to have an insight into market trends and risks and will be able to advise you against possible pitfalls in leasing. Together with the financing company, and a great tax consultant, you should walk away with a lease agreement that fully benefits your company and helps you grow into the company you want it to be. 


Finance Lease vs. Operating Lease: A Comprehensive Guideline

As a business owner, we are sure that the phrase “We need new equipment” must send you into a cold sweat. As much as equipment is vital to the company operations; whether it be replacing old, outdated equipment, or expanding your operations, equipment is expensive. 

Most companies, whether they have been around for years and have a solid place in the market, or whether they are a startup, will battle to cover the cash layout of a new piece of equipment. In fact, most financial advisors lean away from using the working capital of the organization for buying new equipment, and rather promote equipment financing. 

Bearing this in mind, we thought we would take a look at leasing and the intricacies of how this financing option could be beneficial to your company. We thought we would break down the two most common leases and map out their differences. So, if you have wondered the difference between finance leases vs. operating leases, read on. We unpacked the difference of terms, financing benefits, and how it can be used to benefit your company. Let’s start off with the main differences between the two leases and why a company would choose one over the other.

Definition of a Finance or Capital Lease

A finance lease is also known as a capital lease or $1 buy-out lease. It is an option for the company to lease a piece of equipment for the majority of its useful life with an intention of owning the equipment at the end of the term. 

These leases have a balloon or residual at the end of the term that will need to be paid out to the lessor for the lessee to take over title ownership of the equipment

This kind of lease is usually taken when the equipment that the company needs will not become obsolete over a period of time. With technology evolving as quickly as it is, the equipment can become redundant easily and will need to be replaced and upgraded over a period of time. In the case of a finance lease, this will not be a concern. Equipment acquired with a capital lease is expected to last a number of years, and way beyond the leasing period. 

Definition of an Operating Lease

An operating lease or Fair Market Value Lease is finance taken on equipment for a period of time less than its useful life. So, in the case of equipment that will need to be regularly upgraded and replaced, this is the type of lease that a company would sign for. 

The equipment can be acquired over the agreed-upon duration of the period and then either returned to the lessor for an upgrade or re-leased for another set period of time. This will reduce the risk of obsolete equipment being purchased for the company as there is no transfer of ownership. 

Not only does this allow more flexibility for the company to continually grow and expand, but it also reduces the risk of large sum payments on equipment that will only be used for a limited period of time. So, when you need to pick between a financing lease vs. an operating lease, you will need to work out how long the equipment will last. Will you need to continuously upgrade equipment, or can you eventually own it to use it for a number of years to come?

Finance Lease Vs. Operating Lease: The Terms of the Lease

The next thing we need to look at are the differences in terms of the lease. Most terms of leases will differ from lease to lease, especially depending on the equipment and needs involved. But there are some terms which are more likely to pop up in a financing lease and operating lease respectfully. 

The Residual or Balloon Amount 

A finance or capital lease will usually have a residual or balloon amount due at the end of the lease as the lessor will be taking over ownership of the equipment. 

The residual amount is usually calculated at the beginning of the term and is the estimated value of the equipment at the end of its lease term or useful life. When calculating the monthly payments due for the equipment, the lessor will take the residual amount of the equipment into consideration, where the residual value diminishes the longer the useful life or lease period of an asset is.

In the case of an operating lease, because the lessee won’t be taking over the equipment, there will be no residual at the end of the term, and they can decide whether they want to return the equipment, upgrade or re-lease it for another period of time. 

Running Costs and Administration

In the case of an operating lease, because the lessor fully owns the equipment, and the title will not be handed over to the lessee at any point, they will be fully responsible for the running costs. 

Maintenance, insurance, transportation and any other fees will be the responsibility of the lessor. These costs will usually be included in the total monthly payments but will be carried out by the lessor. In some cases, they will also include training in these costs. Should the lessee company’s staff need training on the equipment, the leasing company will be responsible to provide one and send technicians to regularly check up on the equipment. 

For a finance lease, on the other hand, the lessee is usually responsible for these costs. Service and maintenance plans can be worked out for a period of time, but after the lease comes to an end, the lessee will be fully responsible for servicing, repairs and maintenance costs. Should the lessee require any of the additions included to the lease, it will be added to the monthly fees and will be relevant for the stipulated time. 


An operating lease will usually be around 12 to 60 months in duration, with the lease term being less than 75% of the estimated economic life of the equipment. That means that the total payment value made by the lessee over the term of the lease cannot exceed 75% of the total value of the equipment. 

On the other hand, a capital lease term will equal or exceed 75% of the asset’s estimated useful life. In terms of the present value of the equipment, it should equal or exceed 90% of the total original cost of the equipment in the case of a finance lease while the lease payment is less than 90% of the equipment’s fair market value in the case of the operating lease. 

Let’s Talk Accounting 

Now that we have dealt a bit with the finance aspect of the lease, let’s take a look at how they should be reported. 

Finance leases are considered as purchasing an asset and need to be recorded as such on the company’s books. A capital lease, due to the fact that the lessor will eventually own the equipment, will impact on companies’ financial statements, influencing interest expense, depreciation expense, assets, and liabilities.

Capital leases are counted as debt. They depreciate over time and incur interest expense. It is considered a loan (debt financing), and interest payments are expensed on the income statement. The present market value of the asset is included in the balance sheet under the assets side, while depreciation is charged on the income statement. The loan amount, on the other hand, which is the net present value of all future payments, is included under liabilities.

Operating leases are far simpler to deal with. Because the lessee will not be taking over ownership of the equipment, it will merely be considered as expenses in the books. This is rather a contract that allows for the use of the equipment for a period of time but does not convey any ownership rights of the asset.

Operating leases are also known as off-balance sheet financing which essentially means that the leased equipment and associated liabilities of future rent payments are not included on a company’s balance sheet. The company will also not consider the depreciation of the equipment. 

This will mean that the company is still open for lines of credit and will be more attractive to investors due to the fact that money is not tied up in the equipment. 

Wrapping Up 

Based on all of this, you might be wondering which lease is better for your company. The answer lies in what your specific needs are and what equipment you will be needing for your company. An operating lease is financially less risky for your company and is perfect for equipment that will need to be handed back and upgraded over a period of time. A finance or capital lease, on the other hand, is more suited for the equipment that you would like to own at the end of the term, but cannot afford to purchase in a lump sum. 
It is important to ensure that you have the right financing company on your side when you decide to sign a lease. Not only do they need to be credible and reliable, but they should take your needs and economic trends into consideration when advising you on the lease. So, shop around, and do some homework on various financing companies and find one that will help you tailor a specific package especially for your needs.