Equipment Leasing: What It Is and How It Works
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Equipment leasing is a type of financing that lets you rent a piece of heavy equipment from an equipment financing company or another lender or vendor. The lease agreement allows you to use the equipment for a set period of time while making monthly payments. You are the lessee and the owner of the equipment, or the lender, is the lessor in a lease agreement.
Once the lease period ends, the equipment is returned to the owner. In some cases, you may have the option to buy the equipment. Leasing equipment instead of buying it can be a good choice if you need a piece of equipment for a short period of time only or don’t have the money to buy the equipment outright.
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Pros and cons of equipment leasing
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How equipment leasing works
Various types of equipment can be leased, including construction equipment, farm equipment, medical and dental machines, office equipment, communication technology, restaurant equipment, software, tools and vehicles (such as dump trucks, semi-trailers or food trucks).
The specific terms and costs associated with a lease will depend on the equipment leasing company, the equipment, the length of your contract and more. But in general, here’s what you can expect.
Contract period: Can vary between six months to seven years.
Down payment: Low or no down payment.
Lease payments: Monthly, quarterly, semi-annual and annual. Payments may start low, then increase later in the lease term.
Collateral: The leased equipment is often the collateral and it can be repossessed if you fall behind on payments.
End of lease: Equipment is returned; may include the option to renew the lease or buy the equipment.
What is a master lease?
A master lease lets you lease additional pieces of equipment from your lessor without negotiating new contracts for each one. A master lease can be a prudent choice for businesses planning for near-term growth.
What is an operating lease?
An operating lease allows a business to use the equipment for a set period of time without the goal of eventually purchasing the equipment. Because the ownership of the equipment stays with the lessor, they are often responsible for keeping the equipment in working order.
What is a capital lease?
A capital lease also allows a business to use equipment for a set period of time, but this lease often contains an option for the business to purchase the equipment at the end of the term. The business may also be responsible for maintaining the equipment and may also need to get insurance for it, in some cases.
Equipment leasing vs. equipment financing
Equipment financing is a means of buying equipment using a specific type of business loan. The equipment serves as collateral for the loan, and if you default, the lender can seize it. Once your loan is paid off, you own the equipment outright.
In contrast, when you lease a piece of equipment, ownership remains with the lender, and you lose access to the equipment when the lease term ends. However, in some cases, you may have the option to extend the lease or buy the equipment.
In general, leasing is probably the better choice if:
You plan to use the piece of equipment for 36 months or less.
You don’t have cash on hand to make a down payment.
The equipment becomes obsolete quickly.
You want to keep monthly payments as low as possible.
On the other hand, financing the purchase of equipment might be the better choice if you plan to use it for more than three years and your business has the financial security to make a down payment.
» MORE: Equipment loan calculator
How to find equipment leasing
Small businesses have a number of options when considering equipment leasing. Many companies that offer equipment financing also offer equipment leasing programs.
Banks and financial institutions
If you work with a business lender already, you can start by asking if it offers equipment leasing. Banks often charge lower fees than other companies involved in equipment leasing and financing.
Equipment dealers and distributors
Equipment dealers and distributors may also be able to provide services for leasing equipment through subsidiary leasing companies. You can visit their website or contact them directly to learn about your options.
Independent leasing companies
You may also be able to work directly with an independent leasing company, which isn’t typically affiliated with equipment dealers and distributors. Getting quotes from a few companies can help you decide which one has the best terms for your business.
Equipment brokers
Equipment brokers have relationships with equipment manufacturers, retailers and lenders that finance purchases and leases. They can connect you with equipment owners, but they do charge a fee for their services.
Can you write off equipment lease expenses?
You can deduct equipment lease payments on your taxes as rent — as long as you actually have a lease, not a conditional sales contract.
The IRS doesn’t spell out specific definitions of “lease” or “conditional sales contract.” However, it says conditional sales contracts tend to contain provisions like:
After you’ve paid a certain amount, you’ll get the title to the equipment.
Your agreement says you have the option to buy the property for a nominal price, like $1.
The lessor counts some or all of your lease payments toward an equity interest in the equipment.
If you have a lease agreement, then the owner of the equipment gets to claim tax deductions associated with depreciation. But if you have a conditional sales contract, you are considered the owner and can generally take depreciation deductions instead of a deduction for rent.
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