When purchasing equipment for your small business, you’re often presented with two financing options: an equipment lease or traditional term loan. Figuring out the true cost of each option can be tricky. Our equipment lease calculator will help you accurately plan for the actual cost of financing equipment with a lease.
If you have a credit score above 600, a down payment of 5%, no repossessions or recent bankruptcies, you may qualify for up to $100k in low-rate equipment financing with Smarter Finance USA. Heavy equipment? Trucks? Apply here.
Use our equipment lease calculator below to estimate your monthly payments.
As we explain in our complete guide to equipment leasing, there are certain tax benefits that come with equipment purchases thanks to Section 179. You can calculate those saving using our Section 179 Calculator.
Two Types of Equipment Leases
Equipment leases typically fall into two types of leases:
- Lease to Own (aka $1 Buyout Lease, Dollar Buyout Lease)
- Fair Market Value Leases (aka FMV Leases, Percentage Buyout Leases)
$1 Buyout Lease
In a lease to own arrangement, the lessee (the small business leasing the equipment) has the option to buy the equipment from the lessor (the financing company) end of the lease for a nominal sum, usually $1.00.
So, at least in one sense, a Dollar Buyout Lease operates similarly to an equipment loan. You effectively own the equipment when your dollar buyout lease is done.
However, unlike with an equipment loan, you typically can’t pay off an equipment lease early to save interest. The lease is an agreement to pay a specific number of set monthly payments, not principal plus interest. so paying off a lease early means paying off the full lease contract.
Fair Market Value Lease
In a fair market value lease the lessee has the option to buy the equipment from the lessor at the end of the lease, but will be charged for the equipment’s current fair market value. Sometimes, rather than use the fair market value of equipment, lease agreements will simply set a percentage of the original value that must be paid to own the equipment at the end of the lease.
Typically this means the lessee has had smaller monthly payments that they would have had with a dollar buyout lease, but will have a significantly larger payment if they choose to buy the equipment.
Because this is an equipment lease, the lessee does not have to buy the equipment. Rather, at the end of a FMV lease, the lessee could simply return the equipment and walk away. An especially attractive option if new technology has made the equipment obsolete or the equipment is no longer essential to your business.
What Equipment Can You Lease?
Equipment leasing companies typically are looking to finance major purchases and equipment that has both a longer life and has decent resale value. Some examples of equipment that would be good candidates for equipment leasing include:
- Heavy Machinery
- Ovens, Ranges, Refrigerators, etc.
- Tooling Equipment, Laser Cutters, 3D Printers, etc.
- Automation Equipment, Conveyor Equipment, etc.
- Farm / Agriculture Machinery
- Food Trucks and Food Carts
- And much more…
The Equipment Lease Calculator
The equipment lease calculator provides an estimate of what the monthly payments might be to lease equipment. To use the calculator, you must provide:
- The value of the equipment
- The type of the lease
- The effective interest rate charged
- The length of the lease
- The expected life of the equipment
Equipment Lease Calculator Inputs
Dollar Value of the Equipment
How much are you paying for the equipment? Include add-ons and soft costs, like delivery, to the total cost of your equipment. Keep in mind, if the equipment is not new and being sold by a dealer or manufacturer and the lessor is not the company selling the equipment, the lessor will often require a professional appraisal.
Type of Equipment Lease
Are you considering a dollar buyout lease, where you will be able to buy the equipment outright for a nominal charge, usually of $1.00? Or are will you pursue a fair market value lease, where you will have the option to buy the equipment at the current fair market value of some predetermined percentage of its original value.
Effective Interest Rate
The lessor is effectively putting up a lump sum of money on your behalf, which you will pay off with interest over time. The effective interest rate on a lease can be anywhere from the low single digits to over 30% (the average is around 4% -16%).
Length of the Lease
While the length an equipment lease can vary significantly, it’s generally shorter than the expected life of the equipment. In general, longer leases carry lower monthly payments but have higher interest rates, resulting in a higher overall dollar cost.
Expected Equipment Life
Under regular usage, how long is the equipment expected to be productive? Typically the length of the lease will be shorter than the effective life of the equipment. This ensures the equipment retains some value to the lessor in the case the lessee returns the equipment.
Equipment Lease Calculator Outputs
Monthly Lease Payments
What will the monthly payment be? This number is calculated assuming that all payments are the same amount and made once per month.
To calculate additional savings your business may see because your new equipment investment and Section 179 of the tax code, visit our section 179 calculator.
Equipment Value at Lease’s End
The value of the equipment is calculated using a straight line depreciation method based on the value of the equipment at the beginning of the lease and the expected lifetime of the equipment. This figure is especially important for FMV leases, where the lessee may want to buy the equipment from the lessor at the end of the lease.
How the Equipment Leasing Calculator Works
The equipment leasing calculator calculates the value of the equipment at the end of the lease, as well as the monthly lease payment. The monthly lease payments for a fair market value will never be higher than a “lease to own arrangement” for leases with the same general terms (interest rates & length).
With a dollar buyout lease, your payments go towards interest and paying down the full cost of the equipment. With a fair market value lease, your payments are going towards interest and the amount of value which the equipment loses during the time of the lease (or a set percentage of the original value in the case of a percentage buyout lease). As the full value of the equipment will be the same or more than the value lost during the term of the lease, payments are higher for lease to own arrangements.
Underestimating the Cost of a Fair Market Value Equipment Lease
This equipment leasing calculator assumes straight line depreciation, as opposed to other common methods (accelerated depreciation and MACRS depreciation). Essentially, we calculate the depreciation assuming that the equipment loses value at an even rate during its life.
For example, if the equipment has an expected life of 5 years, we assume that it loses 20% of its value each year. Thus, if you have a 2-year fair market value equipment lease, we assume that the lease will lose 40% of its value during the lease.
In reality, depreciation doesn’t happen in straight line. Typically depreciation occurs at an accelerated pace in the early years of equipment’s life. Thus, the equipment may actually lose 50% or 60% of its value by year-2 even if the equipment has a 5-year life.
The lessor will want to be compensated for this greater loss of value early in the lease. In some cases, the lessor will require a down payment to compensate for the effect. Other times, they may simply increase the monthly payment. If the latter is the case, the equipment leasing calculator may underestimate the required payments for fair market value leases.
Equipment Lease vs. Equipment Loan
This equipment lease calculator doesn’t allow you to compare the cost of an equipment lease vs. and equipment loan. That said, the “lease to own” option essentially reflects the cost of buying the equipment using an equipment loan.
To learn more about the differences of financing your next equipment purchase with an equipment lease vs. equipment loan, your our in-depth guide here.
After using our equipment lease calculator to estimate the cost of financing your next equipment investment, it’s time to find a lender.
If you have a credit score above 600, a down payment of 5%, no repossessions or recent bankruptcies, you may qualify for up to $100k in low-rate equipment financing with Smarter Finance USA Heavy equipment? Trucks? Apply here.