Equipment Leasing: 9 Factors to Consider Before Signing

Last Updated on March 24, 2021

If your business uses vehicles, machinery, or just about any other kind of equipment, you may be considering equipment leasing as a way to cut costs. Equipment leasing can be a solid way to supply employees with what they need to get the job done, but it may not be the best fit. Looking at the larger financial picture, you may be able to find better, more cost-effective methods of obtaining the equipment you need.

Before you sign an agreement, it’s important to be aware of pros and cons. Here’s everything you need to know about equipment leasing and its alternatives. 

factors to consider when leasing equipment for your business

What is Equipment Leasing?

Equipment leasing is a type of financing that helps small business owners rent equipment, such as heavy machinery or vehicles. Leases come with a set time duration. Once the lease is up, you’ll have to return it, buy it, or renew your lease. 

Equipment leasing is different from equipment financing—which involves taking out a loan to purchase the equipment, using it as collateral, and paying off the loan over a fixed term. Once the agreement is paid off, you own the equipment. 

Equipment leasing comes with lower monthly payments, but is also more expensive in the long run than financing. At the end of the term, you’ll have to return the equipment, instead of having the option to keep or sell it.

How Does Equipment Leasing Work?

Equipment leasing is more like a rental agreement than a business loan or equipment financing solution. 

When you lease equipment, you enter into an agreement with a financing company or vendor. The details of how long you’ll be able to use it and how much you’ll pay each month will be outlined in the contract. 

It’s important to keep in mind that an equipment lease is temporary. Once that period ends, you’ll have to decide whether you want to buy the equipment, renew the agreement, or find another vendor. 

Equipment financing works in a different way. With this financing option, you’ll obtain a loan to purchase a piece of equipment, which you then pay off over time. Essentially, you’re paying to own an asset, which you can then use as collateral, continue using, sell, or more. 

Types of Equipment Leasing

There’s more than one type of lease. Before signing an agreement, be sure to ask questions and learn about various options. 

The type of lease you choose could have implications when it comes to accounting and bookkeeping. Different companies may offer various products, but these are the most common types of equipment leasing arrangements. 

Operating Lease

An operating lease, or fair market value lease, entails renting the machinery or hardware. You won’t receive any benefits of ownership throughout the duration of your lease. However, once it ends, you’ll have the option to return the equipment or buy it at its fair market value. 

Capital Lease

Capital leases are a good option if you intend to buy the equipment at the end of the lease period. Usually, monthly payments are higher and closer to an equipment loan. 

A capital lease may also be called a $1 buyout lease.

Pros and Cons of Equipment Leasing 

You know your business needs new equipment, but you’re not sure if leasing is the right way to get it. How can you make the right decision? This pros and cons list will help you understand if it’s the right move for you, or if an alternative like equipment financing might be the better way to go. 

Pros

Lower Monthly Payments

Even though equipment leasing is more expensive in the long run, the monthly payments are lower. It may be a good option for small businesses struggling with cash flow.

No Down Payment Required

Most likely, you will not have to come up with a down payment or collateral to secure an equipment lease. That being said, there are many equipment financing programs that also don’t require down payments.

However, leasing companies will take other factors into consideration, such as your credit score and balance sheets.

Ability to Upgrade Equipment Frequently

Short-term leases allow you to trade out a piece of equipment for an upgraded one. If working with the latest hardware is important for your business, then getting an equipment lease might make sense. 

Through equipment financing, though, you’ll also have the option to sell equipment once you own it, then upgrade to the latest model.

Fixed Interest Rate

With equipment leasing, interest rates are automatically incorporated into monthly payments. Your interest rate is also fixed, giving you a clearer understanding of your future expenses.

Tax Benefits

Equipment leasing payments are tax deductible. However, buying equipment also comes with favorable tax incentives – which are even more generous than those on leases. 

You may be able to fully deduct the cost of a newly purchased asset in the first year. You can also qualify for depreciation deductions on purchased machinery. 

Cons

Equipment Leasing Is More Expensive

While monthly payments on an equipment lease are lower, the total cost always ends up being greater than if you were to finance the equipment. After all, you’re paying toward ultimately owning the equipment. 

If you’re looking to save money in the long run, equipment financing might be a better option. 

When the Lease Ends, You’ll Have No Equipment

At the end of your lease, you’ll need to make other arrangements if you still need to use the machinery. You’ll have to decide between renewing your lease, buying the equipment, or looking into other equipment leasing companies. 

Strict Terms and Conditions 

Equipment lease agreements come with rigid rules. You may face penalties if you try to get out of your lease before the end date—or you may be unable to cancel it altogether. It’s not uncommon for businesses to have to keep making payments on their lease, even if they’re no longer using the equipment. 

The agreements may also detail specific upgrades you are required to pay for or specify how you can and can’t use the machinery.

The Equipment Isn’t An Asset You’ll Own

With equipment loans, your payments go towards owning the hardware. Once the loan is paid off in full, you could sell the equipment, exchange it, or do just about anything else. 

Having an asset on your balance sheets also brings additional perks when it comes to obtaining financing in the future. Unfortunately, you won’t gain any of these benefits when you lease.

Equipment Financing Vs. Leasing

If you’re torn between whether you should go the route of equipment financing vs. leasing, ask yourself the following questions.

  • Do you prefer to make smaller monthly payments—even if it ends up costing you more money in the long run? 
  • Do you not have enough cash on hand for a down payment?
  • Is being able to change out your equipment regularly for newer models important to you?
  • Does the type of equipment you use depreciate quickly, to the extent that it wouldn’t be practical to invest in? 

If you answered yes to these questions, then it may be a good choice. Equipment leasing makes sense for businesses with limited working capital or those need to upgrade their machinery every few years.

On the other hand, equipment financing is a solid choice for more established businesses that have enough working capital to cover slightly higher payments, and prefer to save money over the long haul. Businesses operating in industries where equipment maintains a long lifespan would also be better off going the financing route.

How to Apply for Equipment Leasing

National is an online marketplace that helps you secure the best rates, terms, and funding amounts on all your small business financing needs—including equipment leasing and financing. 

Talk to one of our expert Business Financing Advisors about your options for getting the equipment you need to drive revenue. 

Learning your options takes less than 60-seconds. Apply Now!

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About the Author, Megan Capobianco

Megan is passionate about helping business owners along their journey - providing them with relevant content they can use in their day-to-day operations.


Disclaimer: The information and insights in this article are provided for informational purposes only, and do not constitute financial, legal, tax, business or personal advise from National Business Capital & Services and the author. Do no rely on this information as advice and please consult with your financial advisor, accountant and/or attorney before making any decisions. If you rely solely in this information it is at your own risk. The information is true and accurate to the best of our knowledge, but there maybe errors, omissions, or mistakes.