Commercial equipment leasing is a 200 billion dollar a year industry with at least 75 percent of companies leasing some or all of their equipment. There are many reasons why a company would choose to lease versus purchasing their equipment, with the most common being the following:
Less money down. A traditional business loan only lets a company borrow up to 75 percent of the equipment value. With most leases, you are typically only required to come up with the first and last payment.
Tax advantages. Leases allow for the payment to be expensed and kept off the balance sheet. The Financial Accounting Standards Board considers lease rental payments as an expense, not a debt, under many lease agreements.
Flexible terms. It's easier to be approved for a lease than a loan, and there is less documentation required. Leases under $75,000 only require an application in most cases.
Preserve working capital. Does not tie up working capital which enables you to use it to run your business.
The two major types of equipment leasing are operating and capital.
Operating leases are generally used for short-term leases of equipment. The lessee can acquire the use of equipment for just a fraction of the life of the asset. This is beneficial if you do not foresee needing the equipment past the end of the lease term. This form of leasing is ideal if obsolesce is a factor. Under this arrangement, the sum of the payments can not exceed 80 percent of the total value of the equipment. The most common example of an operating lease is a tax lease. There are tax incentives provided by the tax laws for investment and ownership of equipment. The lease rate factor is generally reduced to reflect the lessor's recognition of this tax incentive.
Capital leases are ideal for business that wants to own the equipment after the duration of the lease. One of the following criteria needs to be met at the end of the term for purchase: 1. The lessor transfers ownership to the lessee at the end of lease term; 2. The lease contains an option to purchase the asset at a bargain price; 3. The lease term is equal to 75 percent or more of the estimated economic life of the property (exception is if the equipment is leased toward the end of its useful life); 4. The present value of minimum lease rental payments is equal to 90 percent or more of the fair market value or the leased asset less related investment tax credits retained by the lessor. Two of the most common capital leases are the Purchase Upon Termination (PUT) Lease and Dollar Purchase Lease. With the PUT lease, you agree to purchase the equipment at a predetermined price. The Dollar Purchase Lease only requires $1 to purchase the equipment at the end of the lease, plus all applicable sales tax.
