Figuring out the true cost of an equipment lease can be tricky. Often, you have to calculate the cost for three different lease options: a fair market value lease, a dollar buyout lease, and a ten percent lease. Our easy to use equipment lease calculator will help you accurately plan for the cost of all three types of leases.
If you have a FICO score above 650 and have been in business for more than 3 years, Balboa Capital provide competitive rates on new or used equipment. Apply online HERE and once approved you can get same-day funding for up to $250K.
If you have credit challenges, but no repossessions or recent bankruptcies, you could qualify for cash flow or collateral based funding with Smarter Finance USA. Smarter Finance USA could qualify you for up to $100K in low-rate equipment financing within 1 week.
How the Equipment Leasing Calculator Works
The lease calculator allows you to find your estimated monthly payments, estimated balance to purchase the equipment at the end of the lease, and the estimated value of the equipment at the end of the lease. Simply enter the equipment’s cost, rate, term, and your down payment. Then select the type of equipment lease you’re considering.
Our equipment lease calculator allows you to pick from the 3 most common types of equipment leases:
- Operating Lease (or Fair Market Value Lease): A FMV lease operates the same way as personally leasing a house or car. You make a monthly payment to use the equipment, but have to give it back at the end of your term. Many operating leases give you the option to purchase the equipment at fair market value when your lease ends.
- $1 Buyout Lease (Dollar Buyout Lease): Your payments go towards interest and paying down the full cost of the equipment. This type of lease is similar to purchasing the equipment with a loan. Your monthly payments will be similar, and at the end of your term you can pay $1 to own the equipment outright.
- 10% Option Lease: This lease is similar to a dollar buyout lease because you’re agreeing to a set purchase price when you start the lease. At the end of your term you have the option to purchase the equipment for 10% of the equipment’s purchase price, as set when you signed the lease. The monthly payments will be less expensive than a $1 buyout lease, but more expensive than an operating lease.
The monthly lease payments for an operating lease will never be higher than a loan or lease to own situation, assuming the same general interest rates and term length.
Typical Equipment Lease Rates & Costs
An equipment lease generally has lower monthly payments than an equipment loan. The tables below show the average costs of each equipment lease type and an example of what your costs might look like:
Typical Equipment Lease Rates
|$1 Buyout Lease||10% Option Lease||Operating Lease (FMV)|
|Term||2-5 years||2-5 years||1-3 years|
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
The three options in our calculator are the three most popular options you’re likely to have. You can select to see the costs for a $1 Option Lease, a 10% Option Lease, or an Operating Lease (Fair Market Value Lease).
Effective Interest Rate
When you lease equipment, 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 6% -16%).
How much are you paying up front before you get your equipment? The more you pay, the lower your monthly payments will be, and the less you may have to pay to own the equipment later. In many cases, a lessor will require a minimum of 5% down, but you may be asked to pay 10-20% down. Larger down payments should be expected for equipment that loses value quickly or when the borrower has subprime credit.
Length of the Lease
While the length of an equipment lease can vary significantly, it should be shorter than the expected shelf 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? Whoever ends up with the equipment at the end of the term (either you or your loan provider), will want to make sure the equipment still has value and/or shelf life left.
Equipment Lease Calculator Outputs
Monthly Lease Payments
This shows you an estimation of what your monthly payments will be. This number is calculated assuming that all payments are the same amount and are made once per month.
Cost to Purchase
This represents how much you’ll have to pay at the end of your lease term to purchase the equipment. A $1 option lease, or an equipment loan, will leave you with a negligible balance to purchase the equipment. However, a 10% option lease or fair market value lease will have significant costs if you want to own the equipment at the end of the lease’s term.
Equipment Value at Lease 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 operating leases, where the lessee may want to buy the equipment from the lessor at the end of the lease, but will have to pay fair market value.
Underestimating the Cost of an Equipment Operating 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 a straight line. Typically depreciation occurs at an accelerated pace in the early years of the 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, but 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 operating leases.
Three Main Types of Equipment Leases
Equipment leases typically fall into two types of leases:
- $1 Buyout Lease (aka Dollar Buyout Lease)
- 10% Option Lease
- Operating Leases or 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) at the end of the lease term, for a nominal sum. The sum for a $1 buyout lease is just like it sounds, $1.
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. And you get all the benefits of owning the equipment, such as the tax advantages, throughout the lease term.
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.
10% Option Lease
A 10% option lease is a capital lease like the $1 buyout lease. This means you also get the benefits of owning the equipment for tax purposes, but your payments are also typically less than they are for the $1 buyout lease. This is due to you having the option to purchase the equipment at the end of the term for 10% of the equipment’s value when you sign the lease.
For example, if you use a 10% option lease to purchase $100,000 piece of equipment, then you’re financing $90,000. You’ll have the option to purchase the equipment at the end of the term for the additional $10,000, or 10% of the equipment’s value.
A 10% option lease is a good choice for someone that isn’t sure whether they’ll want to purchase the equipment down the road. You can get lower monthly payments with a 10% option while you wait to see if you will want the equipment long term.
Operating Lease (Fair Market Value Lease)
With an operating lease, you often have the option to buy the equipment from the lessor at the end of the lease term, but will be charged for the equipment’s current fair market value. Your monthly payments will typically be lower with an operating lease, but your payment to purchase the equipment, if offered, will be much higher.
Because this is an equipment lease, the lessee doesn’t 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.
An operating lease also doesn’t give you the tax benefits of owning the equipment like the other leases do, but it also won’t show up on your business books as debt. This is a good thing if you’re looking to get additional financing.
Equipment Leasing Examples
To help get a better idea of what the different types of equipment leases would cost, let’s look at an example. In the table below we show what each lease would look like if we were buying a piece of equipment valued at $25,000, with an interest rate of 10%, a $1,250 (5%) down payment, and get a 5-year lease.
Equipment Lease Cost Examples
|Value of Equipment|
|Down Payment (5%)|
|Cost to Purchase at End of Term|
Equipment Lease Qualifications
Qualifying for an equipment lease is much easier than qualifying for traditional financing you may be used to, like an SBA loan or a bank loan. Traditional financing typically requires prime borrowers who have collateral to put down. With equipment leasing, the equipment is used as collateral so you don’t have to provide any. The only cost you may need to come up with up front is the down payment. The typical requirements are:
- Credit Score: 600+
- Down Payment: 5%+
- Other Requirements: No open bankruptcies, tax liens, or child support collections.
If you have a credit score score of 650+ (check here for free) and have been in business for 3 or more years, Balboa Capital maybe a good option. They offer favorable rates and they can fund up to $250K in equipment financing fast. You can apply online and receive an instant credit decision.
Alternatively, if you have credit challenges or are a newer business, Smarter Finance USA may be able to help you. They offer flexible financing options, can lend up to $100K and can usually get you funded within 1 week.
What Types of 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…
For smaller purchases (like hand tools or microwaves), or equipment with short shelf lives (like software, computers, or dishware), consider looking into unsecured business loans.
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 “$1 lease” option essentially reflects the cost of buying the equipment using an equipment loan, so you get a rough estimation for what your loan might cost.
After you get your estimated costs of your next equipment investment by using our equipment lease calculator, you need to find the right lender. If you have a credit score above 650, been in business for 3+ years and have no repossessions or open bankruptcies, you may qualify for up to $250k in low-rate equipment financing with Balboa Capital.