A Guideline into the Types of Leasing Available to your Company and How to Choose the Right One

Equipment is one of the biggest expenses a business carries, and for most companies, especially startups, leasing it makes more sense than draining cash to buy it. But there is no single type of equipment lease. There are several, each suited to a different situation. This guide walks through the types of equipment leasing available and how to choose the right one for your company.

Tying up a lump sum in equipment is a real risk to cash flow, and that capital is better spent on payroll and day-to-day operations, so you finance it instead, and financing usually wins. Leasing is a big part of that, and the right equipment finance keeps you liquid. As Statistics Canada reports, “The commercial and industrial machinery and equipment rental and leasing industry generated $17.5 billion in operating revenue in 2023, up 8.5% from 2022.” (Statistics Canada).

What is Equipment Leasing?

Quick definition first. A lease agreement is a contract between a lessor and a lessee. The lessor owns the equipment and provides it to the lessee for a set term at an agreed price, so the lessee skips a hefty one-time payment and spreads the cost over time. Leases are usually long-term, anywhere from one to ten years depending on the type, and unlike a rental or a payment plan, breaking the lease contract can carry real penalties.

Leasing takes the pressure off working capital, and if the equipment dates out, you can upgrade and change the lease. The lessor owns the title the whole period. At the end, depending on the type of lease, the lessee pays a residual to take ownership or has to return the equipment. There are different types of leases for different circumstances, and here they are.

Types of Leases

Two types of equipment lease dominate, and three more cover narrower needs. Here are all five, and how you finance each one differs.

Capital Lease

A capital lease is one of the most popular, especially for large, high-value equipment, aircraft for aviation, plant equipment for manufacturing, ships for transport. It is a long-term lease where ownership of the asset passes from lessor to lessee at the end, which makes the lessee the owner. You will also hear it called a nominal or dollar buyout lease. It is non-cancellable, since the lessee intends to purchase the equipment at the end of the term, and because they will own it, the lessee covers maintenance, taxes, and insurance. Accounting-wise, a finance lease like this behaves like a loan: categorized under liabilities, shown as an expense on the income statement, with the asset's market value on the balance sheet. It may not qualify for the tax deductions an operating lease does, since the lessee ends up owning the asset. Ideal for a business that needs expensive capital equipment it cannot buy outright, with no uncertainty about end-of-lease value, since that is set at signing.

Operating Lease

The operating lease is the second most popular. Here the lessee uses the equipment for a term shorter than the asset's life, so these run shorter than capital leases and cover lighter gear, car rentals and vehicles for hospitality, computers and printers for office and tech. The lessee uses the asset for fixed monthly payments set at the start, then returns the equipment at the end with no ownership rights. The lease term stays under 75% of the equipment's useful life, and total payments under 90% of fair market value. At the end, you return it, purchase the equipment on the remaining fair market value, or re-lease. Operating leases are cancellable by either party, with a penalty if the lessee ends early. For accounting, the lease payment books as an operating expense, not an asset, with no debt and no depreciation to track, and the payments are usually fully tax-deductible. As the Canada Revenue Agency puts it, “Deduct the lease payments incurred in the year for property used in your business.” (CRA). Ideal for a business that needs to keep upgrading so equipment never goes redundant.

Leaseback

Less common, but useful: a sale-leaseback lets you pull capital out of an asset you already own. You sell the equipment to a buyer and lease it right back, so you become the lessee and they become the lessor. Companies do this when they need the cash tied up in a fixed asset they still need to operate. You keep using the equipment, so productivity and revenue hold steady, and the freed-up capital can fund expansion or carry you through a tough stretch. It is easy to finance, since the equipment is the collateral, and it can deliver meaningful tax savings, with the monthly payment usually fully deductible, while freeing capital that banks are not financing against your credit. For a lot of companies, a leaseback covers a real business need without slowing the operation down.

The P.U.T. Option Lease

The Purchase Upon Termination lease is rarer. The lease payment is fixed, but a mandatory purchase price is set at the start as a percentage, usually 10% of the original cost of the equipment. At the end of the lease term, the lessee either upgrades, renews, or buys the equipment for that 10%.

TRAC Lease

A TRAC lease is built for over-the-road vehicles, trucks, tractors, and trailers. Instead of fair market value, the residual is set in advance for the end-of-lease purchase, negotiable up front while keeping the lease fully deductible. For a fleet, that predictability is the whole appeal, and leasing may beat buying outright when the numbers are this clear.

Wrapping Up

So there is a lease for nearly every situation, whether you want to eventually own the equipment or just need a year or two of use. With deep industry experience, we can help you finance the right type of equipment lease for your business needs and get the most from both the lease and the gear, keeping the business running while you pay the lowest installment for the equipment you need.