As a business owner, you can use equipment leasing to acquire business-related equipment without the need to purchase or own it long-term. Leasing can be a good option if you only have a temporary need for the equipment, anticipate the need to upgrade it regularly, and don’t have funds for a large down payment to purchase it. It is also suitable if you want the benefit of lower payments to aid your business cash flow.
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 regularly upgrade equipment. 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.
Equipment leasing is a form of financing available through many different types of lenders. One of our top recommended providers for leasing is Smarter Finance USA. It offers up to $1 million in financing, has flexible qualification requirements, and has a track record of consistently delivering excellent customer service.
How Equipment Leasing Works
There are different types of equipment leases, some of which can offer some benefits of ownership. It can also be structured in several different ways, which can determine your total costs and end-of-lease options.
If you’re not sure how to lease equipment, read below as we go over the two types of leases and the five main methods your lease can be structured.
Types of Equipment Leases
- Capital lease: Your business can get the benefits associated with ownership. It can be useful for expensive equipment that you intend to keep for the 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%-20% | High | Capital |
10% Option | 9%-25% | Medium | Capital |
10% Purchase Upon Termination (PUT) | 9%-25% | Medium | Capital |
Fair Market Value (FMV) | Varies | Low | Operating |
Terminal Rental Adjustment Clause (TRAC) | 8%-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 for its FMV at the end of the lease. 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.
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%-30% |
Financing Amount | $3,000-$1 million |
Repayment Term | Varies |
Collateral or Personal Guarantee | Both may be required |
Funding Speed | 1-4 days |
Typical Qualification Requirements | |
Credit Score | 550-plus |
Revenue | Varies |
Time in Business | 6 months |
Pros & Cons of Equipment Leasing
| PROS | CONS |
|---|---|
| It typically requires less funds upfront when compared with 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 those of 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. |
- Fewer upfront funds required: Down payment requirements for leases are generally lower than equipment loans. This can make it easier and faster to acquire equipment as it could eliminate the need to save up funds to qualify for a loan. Although some loans may have low or no down payment requirements, they often carry higher rates and fees. Check out our guide on equipment loans for more details.
- Lower monthly payments: Since you’ll only be in possession of the equipment for a short period of time, lease payments are generally lower than those of an equipment loan. This can be especially beneficial if you have no long-term needs for the equipment.
- Short repayment terms and easier upgrade paths: Technological advancements can render certain types of equipment obsolete over time. If this hinders output or otherwise makes it difficult for you to keep pace with competitors, leases can save you time and money in the long run by making it easier to upgrade your business equipment on a more frequent basis.
- May not be able to purchase at the end of lease: If you decide to change your mind about leasing and want to purchase the equipment at the end of the lease, be aware that this may not always be an option. If this is the case, you may need to purchase it elsewhere or separately, which can end up being much more costly than if you had decided to get an equipment loan from the start.
- May be obligated to maintain fixed costs long-term: If the equipment you’re getting serves a critical business function, know that leasing may mean your long-term costs associated with it may never go down. An equipment loan, on the other hand, would allow you to free up cash flow once the loan balance has been satisfied.
- Equipment needs to be returned at the end of lease: When your lease expires, you’ll typically be expected to return the equipment to the manufacturer by a certain date. If you think you may need it longer, ensure that your lease provides the option to extend or renew the term.
Equipment Leasing: Tax & Accounting Considerations
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 finding someone, you can head over to our guide on how to find an accountant for your small business.
Equipment Leasing Alternatives
If you’re not able to qualify for an equipment lease, we recommend viewing our guide on how to get a small business loan as it contains tips on how to improve your approval odds. If you’re still having trouble getting financing or aren’t sure if an equipment lease is right for you, the following financing options can still allow you to obtain the funds you need to acquire business equipment:
- Equipment loan: If you believe you may need to retain ownership of the equipment, an equipment loan may end up saving you money in the long term. For a comparison of leases and loans, check out our equipment financing guide. If you’re sure it’s the right fit for your company, you can find a provider from our recommendations of the best equipment financing companies.
- Small business line of credit: A credit line can usually provide access to up to $500,000 in funds that can be used for nearly any business-related purpose. Be aware, however, that repayment terms are typically short, between two and four years. Check out our recommendations for the best small business credit line providers.
- Personal loan for business purposes: Personal loans place a greater emphasis on your personal credit and income when qualifying you for a loan. This can be a good option if you have bad business credit or finances. View our recommendations for the top personal loans for business funding.
- Home equity loan: You can tap into your home’s equity with a home equity loan. Understand the risks associated with this, however, as your property is used as collateral and can be foreclosed on if you default on the loan. If you’re considering this option, you can work with a broker like Lendio that can help match you with the right lender and loan program.
Frequently Asked Questions (FAQs)
You’ll usually be expected to return the equipment to the manufacturer. However, some leases allow you to renew or extend the term. You may even be given the option to purchase the equipment if you decide you want to keep it in the long run.
An equipment lease is usually a good fit for companies that have a temporary need for equipment. Leases can also provide an easier path to regularly upgrade the equipment without the need to worry about the logistics involved with purchasing, listing it for sale, or finding a buyer.
In many cases, you can get an equipment lease within two to five days. This depends on the length of time needed to qualify you, the complexity of your company’s credit and finances, and the specific type of equipment you’re getting.
This depends on your short- and long-term goals. You can use our equipment lease calculator to determine your monthly costs based on the lease structure you choose.
Bottom Line
Equipment leasing allows 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.
