Tag: Finance

If you are a business owner, you will know that one of the biggest expenses in the company is your equipment. Whether you are a start-up company or a corporate giant, the fact is that equipment takes a large chunk out of your working cash flow each and every month. Together with rent and wages, equipment falls under the top three most crucial expenses in a business. 

In saying that, equipment, like the labor and property, is one of the most crucial to keep the business running. If you are in hospitality, you will need vital kitchen equipment like fridges, grills, and ovens. Industrial plants and manufacturing businesses spend millions on equipment every year to produce their products. Even offices and technology hubs need vital equipment like laptops and printers to run. 

Buying this equipment outright is usually unattainable for most companies. Even in cases where there is a large enough cash flow to make a large one-off purchase, it is usually in the company’s interest to rather make use of financing options like leasing. So, we took a look at leasing and how can benefit a business. Below are the top seven advantages that leasing will have on the financial stability of your business. 

It Encourages Business Growth With Reduced Risk 

As mentioned, your business needs critical equipment to function, but this equipment can come with a massive price tag. Leasing mitigates the risk of a large upfront payment that will put a lot of pressure on your business. 

When you make a large purchase, you do so with your working cash flow. This is where your monthly expenses like wages, rent, and other monthly expenses come from. By taking a large chunk out of that, you might be putting the rest of your monthly expenses at risk. 

Consider the impact that COVID-19 had on businesses, for example. Both small and large businesses alike were impacted by the pandemic that spread across the world. Cash flows received a direct hit and most companies were taken completely by surprise by the sudden drop in monthly income. This, together with new equipment purchases could cripple a business, so it is usually more advisable to reduce that risk and spread the cost of vital equipment over a period of time. 

It Increases Your Purchasing Power

Apart from reducing the risk to your working cash flow, and monthly expenses, leasing is also incredibly attractive to other creditors and investors too. Leasing provides companies with a credit history, and the more regular and on-time monthly payments reflect on the books, the more stable the company looks to other creditors. 

Leases are also recorded differently compared to bought equipment and make for attractive figures when the books are examined by third parties. 

In essence, you can choose from a number of different leases, the two primary being operating and capital leases. Capital leases usually result in the lessee taking over ownership of the equipment, while operating leases allow the lessee to choose whether to return it or re-lease it after the period of time. 

Both of these will be recorded differently on the balance sheet. Capital leases, because you will eventually own it, are recorded as a liability but the market value of the equipment will be recorded on the balance sheet as an asset.

An operating lease, on the other hand, is recorded as an expense on the balance sheet. It won’t need to be considered a debt and the depreciation of the equipment won’t need to be recorded at all. This will indicate to a third party that you have working capital available to make use of on a month-to-month basis. They will also see bought equipment as a depreciating asset, and when it comes to operating leases, you remove that risk entirely. 

A Lease Is Entirely Financed

One of the biggest differences in signing a lease, especially an operating lease, compared to buying equipment is that the lease encompasses everything related to the equipment. When you purchase equipment straight up, your ownership of it means that you are fully responsible for everything about that piece of equipment. 

In the case of a lease, the lessor, who is still the owner of the equipment, is responsible for the aspects such as maintenance and insurance of the equipment. This means less monthly and annual expenses that you need to worry about.

If you negotiate correctly with the financing company,  you can also have various other equipment-related expenses factored into the lease. Installation costs, freight and transport costs, service contracts, training costs, and sales taxes can all be incorporated into the lease if you negotiate correctly. 

Leasing Allows You To Stay Up To Date

Technology is constantly evolving. Every few months there seems to be an upgrade to some pricey equipment, making the former somewhat obsolete. Leasing reduces the risk of buying vital equipment, that in a few months, will be replaced with something more advanced and fresher. 

If you look at laptops, or mobile phones in an office environment, for example. Making a mass purchase of this kind of equipment will seem futile for your company, as in two years, there will be new technology out which will make communication and operating so much easier. 

Leasing, therefore, eliminates obsolescence. You have the flexibility of acquiring new equipment that is vital for your day-to-day operations, and after a few years, swapping it out for something more advanced without any risk to your business. You can choose to keep leasing or sign a new lease with the new equipment. 

Upgrading, especially with an operating lease is simple to do. Once you have completed the term with the lessor, you are able to re-negotiate terms for new equipment or to have the current equipment upgraded according to your needs. Keep in mind too, if its equipment that requires regular upgrades during the course of the lease, you can negotiate this into the contract. 

It Has Great Tax Benefits

Apart from the fact that you can spread out payments for critical equipment over a duration of months, one of the top advantages of leasing are the tax benefits. In order to get the most out of your lease, speak to a knowledgeable tax consultant who will be able to assist you with reporting it correctly, and ensure that you are positioned in such a way that you get as much back from the lease as possible. 

Lease payments are, in most cases, considered tax-deductible as “ordinary and necessary” business expenses. If you sign an operating lease, from a financial reporting perspective, it will show up as a liability. But is also listed as an operating expense, as mentioned, and the payments themselves are considered necessary for business operations and can be written off. 

In these cases, the short term of the lease means that it will not be considered a debt and you will not need to record the depreciation of the asset. These payments are usually 100% tax-deductible, which means that you end up paying even less at the end of the day on the equipment. 

You will also be able to write off the interest of the lease as this is tax deductible. So, in the long run, you can actually make a lot back from leasing equipment by tax write-offs, and pay less for equipment that you really need. 

Leasing Hedges Against Inflation 

The option of leasing also allows for the lessee to be guaranteed equipment for a period of time at a set cost. You will not, unless you default on payments, lose the equipment, and you are not at risk of paying more for the equipment based on economic fluctuations. 

This is a clear strong advantage as rising and falling interest rates can impact installments on certain financing options, but in the case of leasing, these are determined at the outset of the lease. 

The other advantage lies in the fact that the lease amount is agreed at today’s cost of the equipment. Your monthly expense for the equipment, for the remainder of the term, comes out of tomorrow’s inflated dollar price, so you, in the long run, will be benefiting financially from signing a lease just the right time to get as much as you can out of the equipment. As they say, get more bang for your buck! 

Leasing Is Convenient and Easy to Acquire 

One of the aspects of leasing which is incredibly attractive to companies, especially start-ups, is that it is an incredibly simple, convenient process. Finance houses usually lease out their own equipment to companies and use that equipment as collateral. A lease can be canceled at any time, should the lessee no longer be able to afford the monthly installments, which means that the lessor can simply take back the equipment. 

The process of signing for a lease is also much simpler than making an outright purchase or renting. In most cases, new start-ups do not have any credit history, and this may count against them when it comes to financing. In the case of leasing, finance companies will consider the company, and also take the owner’s personal credit history into consideration when agreeing to a lease. 

The leasing process is also usually straightforward and swift. Many leases can be initiated online, should the finance company offer those facilities. They will also be somewhat quick to turn-over and you will usually not have to wait more than 72 hours to find out whether you have been approved or not. 

It Allows For Great Flexibility For Both Lessor and Lessee

Leasing terms can also be incredibly flexible if you negotiate them correctly from the outset. You will be able to negotiate various clauses and terms on the lease like the duration of the lease, interest rates, and monthly payments. 

It is important to consider your monthly repayments when signing a lease. In order to get the most out of the lease as possible, you will need to know the average cost of the equipment, and what kind of lease you are signing for. This will help you determine whether you are paying a fair installment on the equipment. The rule of thumb is as follows: 

• For a capital lease; the lease term should cover the majority of the equipment’s remaining economic life. This is considered to be 75% or more of the remaining economic life. So, if you are going to be purchasing the equipment at the end of the term, the sum of all the installments should not be more than 75% of the value of the equipment. When you add the residual payment to the total of all the lease payments made, they should match, the fair value of the underlying asset.
• In the case of an operating lease, the sum of all lease payments should not exceed 90% of the equipment’s fair market value. 

As mentioned previously, aspects such as maintenance and insurance responsibilities can also be determined prior to signing, and should you be signing a capital lease, this will be transferred to you once the lease has come to an end. 

Wrapping Up 

Once you have gone through the decision-making process of signing a lease, one of the vital things to consider is the company that will be financing your lease. You will need to ensure that you choose a company that is not only reputable but will take your needs into consideration. 

By conducting research at the beginning of the process, you will be able to establish your risk appetite, as well as reduce the risk to your company by knowing the ins and outs of the agreement you are signing. 

Make sure, at all times, that you have done enough research into the company too as this will reduce any risk to your company. Spend some time in getting to know the company and what they have to offer. Find out if they are open to negotiating terms, and what benefits they can offer when you lease with them. 

Let’s face it, the last few months have been incredibly tough on most people. The global spread of the COVID-19 pandemic across the globe has not only put pressure on companies but has crippled small businesses and even entire industries. 

The sudden loss of revenue for most companies for the period has put companies under severe financial strain and has forced them to re-think strategies and financial processes. Organizations around the world have gone into emergency saving mode, cutting excess costs wherever they can, reducing staff wages, and refocusing on high income-generating strategies. 

One of the key strategies that many companies reevaluated was equipment acquisition. Being one of the most cost-heavy expenses for the company, equipment can put a huge strain on a company’s working cash-flow. But as a critical part of the business operation, equipment sourcing cannot be completely forgone.

So, if you are currently in a tough financial position, whether it be due to COVID-19, or not, and need some guidance on how to continue sourcing equipment for your company, we took a look. With various financing options open to you, you will be able to reduce the pressure on your working cash-flow and ensure business continuation. 

Conduct A Business Assessment 

When your company goes through some sudden and potentially threatening financial changes, one of the first steps that you will need to take is to start reassessing your business as a whole. 

What does your new working cash-flow look like? What are your assets and liabilities statuses like? What is the biggest risk in your organization? You will also need to ask yourself some tough questions about new equipment in order to know just how much to spend, and how to source the right equipment. 

• Do you want to increase productivity?
• Will this increase your productivity?
• Will you be remaining relevant to your suppliers and ahead of competitors?
• Can you upgrade your current equipment?
• What kinds of financial options are there for your company? 

The next step will be to get some buy-in from financial advisors and tax consultants. They will be able to take a look at your books and ascertain your risk appetite, capacity, employee usage, and current resources. 

A full cost-benefit analysis will be able to justify your purchase and unpack how you can use new equipment to get the optimal results for your company. 

You will also need to know what the tax implications will be and whether you will be able to squeeze some benefit out of it from the financing. Leasing, for example, especially operational leasing has great tax benefits. 

Create a Technology Roadmap 

Now that you have an idea of how much you can spend and what your working cash-flow looks like, you can create a blueprint of what your equipment future needs to look like. Remember, if you are investing in equipment, especially expensive, large equipment that will be lasting a number of years, you will need a lifetime plan for it. 

This roadmap will allow you to align your business objectives to long and short-term technology solutions. You will need to assess how your current operations are running, create a one to five-year plan for your goals, and then align it to your technology development priorities. 

The roadmap will also provide you with key insights into how new equipment will be efficiently managed in your business. What will the maintenance plan look like? What is the lifespan of the equipment? When will you need to upgrade to stay relevant? With all of this in hand, you will be able to determine whether you will need to buy the equipment or get it financed. 

Start Looking For Suppliers and Financing Houses

One key aspect of sourcing new equipment is actually shopping around for the right suppliers and partners. 

You are making a very large financial investment and will need to ensure that you have reputable and efficient partners for the transaction. There are a number of things to consider, especially in this financial crisis:

• Don’t only look for the lowest prices on equipment, the saying “It sounds too good to be true” is very relevant these days;
• Consider the customer and post-sale servicing;
• Ensure that you are finding the suppliers from reputable sources. Industry newsletters, magazines, and social media feature numerous trustworthy companies that you can rely on;
• Find out what their maintenance and insurance policies are if you are taking out financing. You do not want to be unexpectedly left with huge maintenance and servicing costs. 
• Unpack warranties too. Should the equipment fail within its lifespan, you could be left severely out of pocket if you didn’t have the right warranty with the supplier;
• Spend some time researching the reviews and reputation of the companies. Not only does social media provide a lot of insight into brand reputations, but you can also contact their listed clients and ascertain their satisfaction.

Should you be opting to finance the equipment, which we will go into next, you should also spend some time picking out the right company.

You will need a reputable financing house that will not only provide you with the right packages but will be able to assist you and give you the right financial guidance. It is important to find a company that will be transparent and accountable and work with you to get the most out of your financing agreement. 

If they are open to negotiating terms, interest rates, payments and term duration, you could be able to get as much as you can out of the agreement as you can. 

Choose Your Financing Option 

There are a number of options available to you to actually acquire the equipment. If you have the working capital, which could be incredibly tough during this financial crisis, and especially if you are purchasing a very big, very expensive piece of equipment, you can purchase the equipment cash. If not, you have the option to rent or lease the equipment through an equipment financing company. 

We took a look at the differences and which would be best for your company. 

Purchasing Equipment 

This is a cash purchase whereby you will be buying the title of the equipment from the outset with a lump-sum of cash. There are a number of reasons why it may be appealing to some companies to buy equipment outright, but there is a larger financial risk and may be highly unattainable, especially in uncertain financial times. 

There are a number of advantages to buying equipment outright. Firstly, the equipment immediately belongs to you, and you are legally the title owner. Secondly, there are a number of tax benefits that come with buying equipment outright and you can write off portions of the purchase to the business. 

However, especially in the cases of small businesses, or businesses struggling financially, there are a number of negatives that come with buying equipment. 

Firstly, a large expense can put a lot of strain on your working cash-flow. Even if you borrow money to finance it, you will be expected to pay a deposit, as well as high-interest rates. 

It is more advisable for struggling companies to use the working cashflow for day-to-day operational expenses and wages than for a large cash purchase. 

Secondly, you could get stuck with old equipment that could no longer be relevant to your company. Especially if you are working with highly technical equipment that updates and upgrades rapidly, you could find yourself not being able to sell it off and buy what you need easily. 

Leasing Equipment 

Leasing equipment could be a much more viable option for smaller businesses and companies fighting through a financial crisis. Because it allows for business continuation and operations to continue, even in financial difficulty, it is the recommended option for these cases.

Leasing allows a company to enter into an agreement with the lessee company whereby the lessee will provide monthly payments to the lessor for an agreed-upon duration of time. In operating lease agreements, this will mean that the lessor maintains the title of the equipment and the lessor will never own the equipment. They will rather return it at the end of the term, renegotiate or upgrade to newer equipment.

In the case of a capital lease, the agreement is signed in order for the lessee to eventually take over ownership of the equipment. This will mean that they will not need to set out as much initial capital as buying to eventually own the equipment. 

The advantages of leasing equipment for a start-up or struggling business far outweighs purchasing the equipment off-hand. Not only, as mentioned, is there less initial capital and risk for the company, but the lessee can negotiate the installment amount, term and occasionally even interest rate to benefit them. 

Operational leases can be highly effective in cases of rapidly evolving equipment. Take IT equipment and laptops for example. In most cases, businesses will need to upgrade every two years. Leasing, therefore, makes sense, as you will be able to complete the term and start a new lease for new equipment. 

There are a number of tax benefits that come with operational leases too. Not only can you write off the interest, but due to the fact that it is considered an operational expense and is not listed as an asset, you can reap various tax benefits. You will also be more attractive to investors and other creditors as you will not have it on your books. 

Wrapping Up 

In these times, and in any financially tricky time, in order to remain in business, it could be worth your while reevaluating your operational strategy. Leasing equipment that is critical to your business’ continuity could be worth investigating due to the reduced risk and strain on your working cash-flow. Make sure you partner with a reputable equipment finance company which will not only work with you to reap maximum benefits of the lease but will also advise you on the best route to take when financing your equipment.

If you have just launched your new business, one of your biggest priorities will be acquiring the right equipment to operate your budget with your available budget. Being a start-up, you most likely do not have a large amount of liquid capital available to make large, one-off purchases of equipment.  

Whether you are in hospitality, office, manufacturing, or aviation, the right equipment can determine the success of your business, so, investing in this equipment is absolutely necessary. Equipment, however, can be incredibly expensive. Aviation requires aircraft, transportation requires trucks and a manufacturing business requires plant machinery. This is certainly not one that you can and even should buy in cash. 

We thought we would take an in-depth look at one of your equipment financing options; leasing. In this article, we unpack what leasing is, why leasing equipment is a great option for your start-up, and how you can go about leasing equipment. 

What is Equipment Leasing?

Essentially, equipment leasing is a financing option that is available to companies, taking the strain off the start-up of making a large, one-time purchase. They are similar to rentals, where the risk is taken off both the lessor and the lessee, but are more complex in structure. 

A lease is a contract, with set terms that are agreed upon at the outset of the agreement. The lessor will hold the title of the equipment and owns the equipment throughout the duration of the lease. Depending on the type of lease that is signed, the lessor can purchase the equipment at the end of the lease, re-lease it, or return it to the lessor. 

The lessor will pay, in equal monthly installments to use the equipment over a period of time and continue to use working capital for the day-to-day operations of the business. Because the lessor owns the equipment throughout the duration of the lease, the actual equipment is used as collateral in case of the lessee’s failure to pay for the equipment. 

The Components of a Lease 

Now that we know what a lease is, let’s take a look at the main components that make up a lease, and what you can expect to sign-up for. 

Lease Duration

This is the length of time that the lease is signed for and will be determined by the company’s needs. Should the company need a large piece of equipment that will last them a significant period of time, a longer lease can be instituted. For a smaller business, with rapidly changing needs, and equipment that becomes redundant quickly, shorter leases are favorable. 

Payment Amount

This is the agreed amount that will need to be paid monthly over the duration. It will be set by the lessor, but the lessee will need to establish when signing whether the cash flow will be able to meet the payments as well as the interest. The agreed amount will also include the residual amount should the lessee be taking ownership of the equipment at the end of the term.   

Financial Terms

These are the terms that determine when the first and last payments are due, the date of due payments, and the penalties for late payments.  

Tax, Maintenance, and Insurance Responsibilities

This will be determined by the type of lease that is agreed upon. In the case of a capital lease, for example, because the lessor will be purchasing the equipment at the end of the term, they will be responsible for these costs. An operating lease on the other hand will put the responsibility of these costs on the lessor as they will either retrieve the equipment at the end of the term or re-lease it. 

Cancellation Provisions

Every agreement requires a cancellation clause to be included. Capital leases, which are instituted for the lessee to eventually purchase the equipment, however, are usually non-cancellable. 

In the case of either the lessor or the lessee not meeting their obligations, there are clauses that allow for such cancelations to be made. These do usually come with penalties, but these penalties will be disclosed at the outset of the lease and will be able to be absorbed into the risk appetite of the company. 

Market Value of Equipment

The market value will need to be stated in each lease, especially a capital lease, where the lessor will be most likely paying a residual according to the fair market value. But this amount is also important to determine the monthly payments, interest,  and insurance costs. 

Lessee Renewal Options

In the case of an operating lease, these options will need to be indicated should the lessee need to continue using the equipment at the end of the lease. They may want to reduce the monthly cost, or even have an opportunity to purchase the equipment. 

The Numbers Behind Leasing 

As a small business owner, you will need to know exactly how leased equipment needs to be reported in your books and where you need to put them on the balance sheet. It is also important to know the tax implications of a lease, and whether they are tax-deductible or not. 

In order to know this, you need to establish which type of lease you will be signing for. As mentioned previously, a capital lease is one that is usually used for larger equipment, where the lessee will be taking over ownership of the equipment at the end of the term. An operating lease will end with the lessor returning or even re-leasing the equipment. So, they will have different financial implications. 

A Capital Lease

Because this type of lease is similar to a loan and will result in the ownership of the equipment, it will be categorized under liabilities as a loan. It is reflected in the income statement as an expense and the market value of the equipment, which is reflected on the lease will be recorded on the balance sheet as an asset. 

It is, however, not tax-deductable like the operating lease is, due to the fact that the lessee will eventually be owning the asset and will take on the full residual value. As mentioned, insurance and maintenance costs will be the lessee’s responsibility. 

The Operating Lease

This type of lease is ideal for smaller businesses that are leasing items for operational purposes like cars, IT equipment, hospitality equipment, and even property. These are leases that are used for equipment that evolves quickly and becomes redundant in a few months or years. 

This lease is treated as an operating expense on the balance sheet. Because the equipment is not, and will most likely not be owned by the lessor, it will not be recorded on the balance sheet as an asset at all, unless a capital lease agreement is entered. In the same breath, it won’t need to be considered a debt and the depreciation of the equipment won’t need to be recorded. 

This type of lease is usually 100% tax-deductible, and the interest that you pay per month will also be tax-deductible. This usually means that you can write off a large chunk of the payments to the business. 

Is Leasing A Good Option for Your Start-Up?

As a start-up business, you might be wondering whether leasing is the best option for you. As a rule of thumb, yes, leasing may be one of your least risky options to acquire the new equipment that you really need to operate your business, especially if you lack the initial capital needed to purchase it. 

We took a look at how leasing could benefit you as a start-up.

Less Financial Risk  

As mentioned before, leasing reduces the risk of the upfront capital needed for the equipment. This working cash-flow can rather be used for day-to-day expenses in the company, like wages. But it also reduces the risk to the company in tough financial times. As we have seen with COVID-19, your economic well-being can change somewhat unexpectedly, so it is advisable to have money in the bank while paying monthly installments on equipment. 

It will also take a great strain off of your working capital. A large sum of money to buy equipment could be incredibly risky as your working capital could be better used for day-to-day operating expenses like wages, and emergency funds for tough financial times. 

A lease rather allows you to stretch out a payment over a number of months and allows your company to absorb the risk. In most cases, the interest of the lease will be written off to the company, meaning less risk for it. 

There is Greater Flexibility and Room to Upgrade

As a start-up, your equipment needs are likely to rapidly evolve. If you are in an industry where technology becomes redundant quickly, a lease is a better option for your company to keep up with your changing equipment needs. 

Take your IT equipment, for example, like your laptops that you work off of. Laptops, printers, and office equipment usually have a lifespan of around one or two years. From then, their performance will start being impacted, and there will be more advanced technology on the market that will suit your needs. Leases, especially operating ones, allow you to either upgrade or re-lease the equipment at the end of the period. 

Leases are also one of the more flexible financing options as the lessor is more likely open to negotiating the terms, monthly payments, interest rates, deposits, and residuals. In certain cases, you can also negotiate the maintenance and insurance responsibilities for particular leases. 

They Are Easy To Apply For

One of your greatest concerns as a start-up may be the fact that you have little to no credit history. In most cases, this will negatively affect how lenders look at you and view your organization when it comes to providing you with financial aid. 

In the cases of leases, however, lessors are more open to providing equipment and leases to start-ups due to the fact that they are leasing their own equipment and using it as collateral. They are more likely to take your personal credit history and financial status into consideration to provide you with the lease. 

The process itself is also incredibly easy to go through. Not only are leases usually approved within 24 hours, but many of them can be done online and approved with a few checks. 

Let’s Talk About Tax

We touched on the tax aspect earlier, and we highly recommend that you hire a registered tax accountant when you sign a lease. Leasing equipment has much higher tax benefits than buying outright, so make sure you have someone on your side to really reap the rewards. 

Because you don’t own the equipment, you won’t need to report the depreciation value of the equipment as a capital cost, and because the payments are tax-deductible, you don’t have to pay additional tax at the end of each year for the machine.

Leasing equipment means that you can also write off a machine that depreciates over time quicker as well as avoid the taxes on the initial up-front costs of a cash sale.  

Wrapping Up

If you are considering leasing equipment for your start-up business, we highly recommend that you do enough research into the agreement to ensure that your risk is as low as possible throughout the entire term. 

Spend some time getting to know the various financing companies in order to ensure that you have a reputable and trusted lessor on your side who is transparent and accountable. If you can, negotiate the terms of the lease to ensure that you get as much value out of it as possible, and always look for options to upgrade once the lease is complete, or whether you can purchase the equipment at the end of the term if necessary. 

Lastly, get a good tax consultant on your side, or a registered accountant to get as much as you can out of the lease! 

If you are a business owner, you will know that one of the biggest expenses in your company is equipment. Whether you are in construction, transportation, hospitality, or in office and technology, equipment is critical to business operations. 

Most companies, especially start-ups, do not have enough capital at the outset to buy equipment. In fact, it is a huge risk for the cash-flow of any business to use a lump sum of money to buy equipment. A large piece of equipment can be recorded on the books as an asset, but in most cases, it could also be seen as a depreciating liability. 

This, together with the fact that a working cash-flow needs to be allocated to day-to-day operations in the business, like salaries, means that it usually makes more sense to finance the equipment. So, we took a look at leasing equipment, what options you have available, and how you can choose the right one for your company. 

What is Equipment Leasing?

To start off, we thought we would take a quick look at what equipment leasing is, and how it differs from other equipment financing options. 

A lease agreement is a contract between a lessor and a lessee where the lessor will provide equipment that they own to the lessee for a set term at an agreed-upon price. This means that the lessee can forgo a hefty, once-off payment for equipment, and rather spread it over a period of time. 

Leases are usually long term contracts, depending on what type you enter into, and can last anywhere from a year to ten years. Unlike a payment plan and a rental agreement, there can be significant penalties should either party not hold up to their side of the contract.

Leases allow the lessee company to take the pressure off their working capital, and ensure that should the equipment become outdated or redundant after a while, they can simply upgrade and change the lease. 

The lessor will own the title of the equipment for the full period, and at the end, depending what type of lease it is, a residual can be paid by the lessee to transfer the title to own the equipment, or the equipment will be returned. 

There are different types of leases, however, to suit each unique circumstance. Below are the various types of leases that you can choose from for your company. 

Types of Leases 

The next thing to look at is the types of leases you can acquire. There are two very popular types of equipment leases and three more which are less common. We took a look at all five. 

Capital Lease 

A capital lease is one of the most popular, especially when it comes to large equipment with a very high value. Aviation companies will use these types of leases for aircraft, manufacturing ones for large plant equipment, and transport for ships, for example. 

The capital lease is a long-term lease where the ownership of the asset will, at the end of the lease period, be passed from the lessor to the lessee. This will make the lessee the owner of the equipment. It is also referred to as a nominal or ($1) dollar-buyout lease

This type of lease is non-cancellable due to the fact that this loan is instituted with the lessee’s intention to purchase the equipment at the end of the term. Due to the fact that they will be purchasing the equipment, the lessee is responsible for the maintenance of the asset as well as paying taxes and insurance on it. 

This type of lease is very similar to a loan and is categorized under liabilities as a loan. It will appear in the income statement as an expense, and the market value of the asset will be recorded on the balance sheet under the asset column. It may not qualify for tax deductions due to the fact that the lessee will be owning the asset, and maintains full control of the residual value. 

This type of lease is ideal for businesses that need expensive capital equipment that they may not have the funds to buy immediately. The other advantage of the lease is that there is no uncertainty about the value of the equipment at the end of the lease, as this is determined at the signing of the initial agreement. 

Operating Lease

The second most popular type of lease is the operating lease. This type of lease allows the lessor to use the equipment for a period of time which is shorter than the life of the asset. This means that these leases are shorter terms than capital leases and include assets and equipment which is not as hefty as aircraft and plant equipment. 

These are leases for the hospitality industry, for example, car rentals, vehicles, or hotel rooms. It could also include office and technology industries for office equipment like computers and printers. 

The lease states that the lessee may use the asset for an agreed period of time for fixed payments which are agreed upon at the beginning of the term. The lessee will have to return the equipment to the lessor at the end of the term and takes no rights in ownership. 

The term of the lease is not more than 75% of the equipment’s anticipated useful life and the total payments made by the lessor should not be greater than 90% of the equipment’s fair market value. A lessor can choose to return the asset or purchase the equipment on the remaining balance of the fair market value. They may also choose to re-lease it, for a specified period of time. 

This lease agreement is cancellable and can be done so by either party if either does not hold up their end of the agreement. A lessor can cancel and have the equipment returned if the lessee defaults on any of the payments. A lessee can also opt to cancel the lease before the end of the period, but this will usually come with a penalty. 

For accounting purposes, this lease is treated as operating expenses on the balance sheet and is not recorded as an asset. Due to the short term of the lease, it will not be considered a debt and will not need to record the depreciation of the asset. Similarly, the lessee doesn’t treat operating leases as a liability in the balance sheet. These payments are usually 100% tax-deductible, which means that you end up paying even less at the end of the day on the equipment. 

These kinds of leases are usually ideal for businesses that need to constantly update and upgrade their equipment and ensure that the equipment does not become redundant. 

Leaseback 

Although not as popular as the previous types of leases, this is another option available where you can generate capital for your business needs with your assets. This is a lease agreement where the seller of the asset leases it back from the buyer of the asset. In essence, this will mean that the seller becomes the lessee and the buyer becomes the lessor.  

This may seem unnecessary, but companies usually enter these types of agreements when they need the cash that has already been invested in a fixed asset, and that asset is needed for the company to operate. 

Essentially, you can continue to use your equipment in order for productivity not to slow down and for revenue to remain constant. You can also use the extra capital to expand the business and increase revenue or to keep the business afloat during tough times. 

Financially, this is great on your books as you can recover up to 37% in tax savings and because you are leasing your equipment back, the full monthly payment is 100% tax-deductible. 

These kinds of leases are not difficult to apply for as you can use the actual equipment as collateral. Financially, it is also very beneficial to your balance sheet as the assets that you pay taxes on converted into contingent liabilities may also lower taxes. It also means that more capital is freed up for businesses as the equipment is not being financed by banks, and impacting your credit.  

The “P.U.T.” Option Lease

The fourth and more uncommon lease is the Purchase Upon Termination lease. Lease payments are fixed, yet a mandatory purchase price is established at the beginning of the terms and is expressed in a percentage. Usually, the lessee must purchase the equipment at the end of the term at 10% of the original equipment cost. This will leave them with two options; either upgrade or renew the lease or actually purchase the equipment for 10% of the original cost.

TRAC Lease

These types of leases are created especially for “over-the-road” vehicles like trucks, tractors, and trailers. Residual values are determined for the end of the lease to purchase instead of the fair market value route. This can be negotiated in advance while maintaining the full deductibility of the lease.

Wrapping Up 

As you can see, there are a number of options for you to choose from which will suit your unique needs. Whether you are looking for a lease to eventually own the equipment, or need a temporary solution that will serve your needs for a year or two, you have several choices with us. With our extensive experience in the industry, we will be able to guide you in choosing the right lease for you and assist you with getting the most out of both the lease and equipment. Your financial peace of mind is our priority, and we will help you make sure that your business keeps operating while paying the lowest installment for your much-needed equipment.