Equipment leasing allows your company to obtain business equipment without the need to purchase it. Leasing carries many benefits, such as allowing you to upgrade or switch the equipment once the initial lease term expires. Lease payments tend to have lower payments and can be structured in several ways to suit your cash flow and business needs. Some leasing companies even provide you with the flexibility to purchase the equipment at the end of the term.
Leases can be obtained from a number of different lenders, including brokers, banks, credit unions, dealerships, and equipment manufacturers. Smarter Finance USA is one of our top recommendations as it offers up to $1 million in financing with easy qualification requirements.
Key Takeaways:
- Leasing can be cheaper than buying: Upfront costs and periodic payments on a lease can often be lower than what would otherwise be required on a purchase.
- Leasing can make it more cost-effective to upgrade equipment regularly: At the end of your lease term, you’ll typically need to return the equipment to the manufacturer, making it easier for you to get a lease on new equipment.
- Some leases allow you to purchase at the end of the term: Not all leases require you to give up ownership as some provide you with the flexibility to purchase the equipment upon the expiration of the initial lease term.
How Equipment Leasing Works
As part of knowing how to lease equipment, you’ll need to be aware of the two main types of equipment leases and five common ways to have them structured. The type of equipment lease you get determines whether it is mainly a rental or if you can get some benefits of ownership. Meanwhile, lease structures determine your payment amounts, rates, fees, and more.
Types of Equipment Leasing
- Capital lease: Your business can get the benefits associated with ownership. It can be useful for expensive equipment that you intend to keep long-term. With this type of lease, your business can retain ownership of the equipment once the lease term expires.
- Operating lease: This does not provide any ownership benefits. Rather, your payments give you the right to rent the equipment. Once the lease expires, you agree to give the equipment back to the manufacturing company. At this point, you can choose to get a lease on other equipment. Depending on how your lease is structured, you might be able to negotiate an extension to the original lease.
Equipment Lease Structures
We’ve listed five common ways an equipment lease can be structured, along with some of the corresponding characteristics. Keep in mind that the exact terms can vary from lender to lender.
Lease Structure | Typical Interest Rates | Typical Payment Size | Type of Lease |
---|---|---|---|
$1 Buyout | 8% to 20% | Highest | Capital |
10% Option | 9% to 25% | Medium | Capital |
10% Purchase Upon Termination (PUT) | 9% to 25% | Medium | Capital |
Fair Market Value (FMV) | Varies | Low | Operating |
Terminal Rental Adjustment Clause (TRAC) | 8% to 15% | Medium | Both |
At the end of this type of lease, you’ll have the option to purchase the equipment for $1. As a result, payments on a $1 buyout lease tend to be higher.
This type of lease is useful for business owners who want to purchase business equipment but prefer to spread payments over a longer period. This can help reduce upfront costs associated with buying equipment and allow companies to retain more funds for working capital.
With a 10% option lease, you can choose to purchase business equipment for 10% of its value once the lease term ends. As an example, machinery valued at $100,000 would have a lump-sum payment of $10,000 due at the end of the lease if you chose to purchase it.
10% option leases can be good for business owners who are unsure if they want to retain ownership of equipment at the end of the lease. Compared to other types of lease structures, business owners will have to weigh the pros and cons of the payment amounts and the cost of purchasing the equipment.
A 10% PUT requires you to purchase the equipment at the end of the lease for 10% of its value. Compared to a 10% option lease, a 10% PUT can have easier qualification requirements for things like credit score, revenue, and time in business.
An FMV lease allows a business to purchase equipment at the end of the lease for its FMV. Other options commonly include renewing the lease or returning the equipment.
While this lease can have some of the lowest payment amounts, the downside is that the value of the equipment may not be known upfront. FMV leases can also be more difficult to get, requiring businesses to have higher credit scores and revenue.
A TRAC is typically only used for trucks and vehicles. It gives you the option to have lower or higher payment amounts depending on what you want your final lump-sum payment to be at the end of the lease term.
Equipment Lease Rates, Terms & Qualification Requirements
Rates, terms, and qualification requirements for an equipment lease will vary depending on the type of equipment you’re getting. Equipment that holds its value over a longer period can help you get more favorable rates and terms. The lender you choose and your business credit and finances are other factors that can influence your rates and terms.
You can head over to our guide on the best equipment leasing companies to find one suited for your business needs. We’ve selected providers that can help businesses in a wide variety of industries, including startups and businesses with bad credit or low revenue.
Below are typical rates, terms, and qualification requirements you can expect to find, but keep in mind that these can vary depending on the provider you choose.
Typical Rates & Terms | |
Estimated Annual Percentage Rate (APR) | 7% to 30% |
Financing Amount | $3,000 to $1 million |
Repayment Term | 6 years |
Collateral or Personal Guarantee | Both may be required |
Funding Speed | 1 to 4 days |
Typical Qualification Requirements | |
Credit Score | 550-plus |
Revenue | $100,000 annually |
Time in Business | 6 months |
Equipment Lease Tax & Accounting Treatment
Leasing equipment for your business may carry tax benefits to reduce the effective cost to your company. For example, you might be able to write off the full amount of your lease payments from your taxable income. Similarly, you may have the option of claiming depreciation on the equipment over multiple years, rather than taking it in a single year.
Given that tax treatment can vary based on your business circumstances, it’s recommended that you discuss your scenario with an accountant so that you can choose the best option for your company. If you need help with finding someone, you can head over to our guide on how to find an accountant for your small business.
Pros & Cons of Equipment Leasing
PROS | CONS |
---|---|
Typically requires less funds upfront when compared to purchasing equipment | Not all leases provide you with the option to purchase the equipment at the end of the lease |
Monthly payments are usually lower than equipment loans | Long-term costs of leasing can be higher than purchasing equipment |
Most leases are short-term, making it easy for businesses to periodically upgrade equipment | Equipment may need to be returned to the manufacturer at the end of the lease |
Considerations for When To Use an Equipment Loan
An equipment loan is one common alternative to an equipment lease. The key difference is that with a loan, you retain ownership of the equipment at the end of the term. Below are some items to consider to help you determine whether a loan or lease is a better fit for your needs. You can also learn more about the differences between a loan and a lease in our article on equipment financing:
- Payment amounts: Leases typically have lower payments compared to a loan. However, the tradeoff is that you’ll typically have to return the equipment to the vendor once the lease expires. You can use our equipment lease calculator to estimate your total costs.
- Upfront funding requirements: Leases generally have lower upfront costs, which can allow your business to retain more working capital for other business needs. Loans, on the other hand, can require an initial down payment of anywhere from 10% to 30% or more.
- Frequency of upgrading equipment: If you need to upgrade equipment regularly, a lease can be a better option. Once the existing lease ends, you can essentially upgrade to newer equipment with another lease.
If you’re still unsure if an equipment loan is the better fit for you, head over to our in-depth guide on business equipment loans to learn more about who they’re right for and how they work.
Alternatives to Equipment Leasing
If you’re unable to get approved for equipment financing, whether it is a loan or a lease, you can consider the following options. These alternatives can be easier to get and offer more competitive rates and terms. Also, check out our guide on how to get a small business loan for tips on how you can improve your chances of landing an approval:
- Small Business Administration (SBA) loans can offer some of the most competitive rates but typically require businesses to have good credit and finances. Loans can also take between 30 and 90 days to get approved and funded. If you’re interested in this type of loan, you can visit SBG Funding.
- Small business line of credit: This is a flexible revolving loan that allows you to draw funds on an as-needed basis, making it an excellent option for covering temporary funding needs and unexpected expenses. See our top-recommended small business line of credit providers.
- Personal loan for business purposes: If your business credit or finances are not good enough to get approved for an equipment loan or lease, consider a personal loan for business purposes. Qualification requirements can be easier, and you can check out our selections for the best personal loans for business purposes.
Bottom Line
Equipment leasing can allow your business to get equipment without needing to purchase it. Compared to purchasing equipment with a loan, leases carry benefits such as lower payments and fewer upfront costs. Depending on the lease you get, you may have the option to extend your lease once it expires or possibly even purchase the equipment. Now that you know how to lease equipment, shop multiple lenders and consider alternative financing options to get the best rates and terms.