Equipment leasing

What is equipment leasing?

If a business needs equipment to operate, it will either have to purchase via a business loan or lease it. Under an equipment lease, a business owner will rent the equipment for a fee, and at the end of the lease, there is an option to either keep the equipment (if paid up in full) or return it for a newer model, depending on the type of lease.

Types of leasing options

Small business owners looking to purchase equipment for their business won’t have to pay cash for it upfront. To procure the latest equipment without paying a large amount of cash at once, you have three finance solutions: operating lease, finance lease, and contract hire.

What is an operating lease?

If a business owner wants to have use of equipment but not the ownership then an operating lease is the best option. The lender gives the business owner the use of the equipment over an agreed timeframe, with no option to outright purchase the asset at the end of the lease agreement. Operating leases usually run for less than the useful life of the equipment, so the lender will expect to be able to sell the equipment at the end of the lease (residual value).

Benefits of operating lease for business equipment

• Allow companies greater flexibility to upgrade all types of equipment, which reduces the risk of obsolescence.

• Risks remain with the lender as the lessee is only liable for the maintenance costs.

• Operational expenses are fully tax deductible.

• Only one monthly repayment.

• No balloon payment, so it is relatively easy to bear the cost of a vehicle.

What is a finance lease?

A business finance lease is a good way to get the equipment you need without the high upfront costs. The leasing company buys the asset and rents it to you for an agreed lease period. In contrast to an operating lease, all of the risks and rewards of ownership of the equipment fall to the lessee. 

How a finance lease works for equipment

You can think of a finance lease as a commercial rental agreement, and the following steps are typical:

Step 1: The business owner selects equipment that they need for their business

Step 2: The lender purchases the equipment

Step 3: The lender and business owner enter into a legal contract, which gives the business owner the right to use the equipment for a set amount of time

Step 4: The business owner makes monthly repayments in return for use of the equipment

Step 5: The lender receives the cost of the asset plus interest

Step 6: At the end of the lease agreement, the business owner is given the option to take ownership of the equipment

Benefits of a finance lease for equipment

• No cash upfront

• Lower monthly repayments

• Better for cash flow than purchasing

• Tax benefits (payments can be expensed rather than capitalised and depreciated)

• Quick approval (24-hours)

• Preserve capital for use in company growth initiatives

• No technological obsolescence

What is a contract hire?

One of the easiest ways to rent equipment is the all-inclusive contract hire lease. It combines all of the benefits of an operative lease, but with additional maintenance packages, for a fixed monthly price. Once an upfront rental fee is paid, you can benefit from lower fixed monthly payments, and can return the equipment at the end of the lease agreement. It’s important to note that similar to a finance lease, you can offset the rental fees against taxable profits, as they are also considered a business expense.

Benefits of a contract hire

• Easy on your budget due to low rental payments

• Affordable pricing (lower upfront costs)

• Predictable fixed-term and fixed-interest payments

• Tax benefits via rental fees lowering taxable profits

• Easier to budget as contract hire includes maintenance for running costs

Should I buy or lease equipment?

So, what are the benefits of leasing vs. buying equipment? 

Buying pros:

• Full ownership of the equipment

• Lifetime cost is cheaper 

• Asset on your balance sheet

• Depreciation allowed on equipment

• Full control of equipment 

• Can sell the equipment after using it

Leasing pros:

• No upfront payment is required

• Terms are more flexible (e.g., can buy out lease)

• Can test out equipment before committing

• Maintenance costs included

• Payments are tax-deductible 

• More accessible with bad credit businesses

• Easier to upgrade after your lease expires

• Easier to acquire more quickly

Buying cons:

• Need more cash or credit upfront

• Cannot always test out the equipment before purchasing

• Responsible for maintenance and replacements

• Risk being stuck with outdated equipment

• Increase liabilities on the balance sheet, which could prevent you from borrowing more money

Leasing cons:

• You don’t own the item while leasing it

• Higher lifetime costs

• Depreciation isn’t tax deductible

• Obligation to stick with the lease due to contractual obligations

• Break clause for ending the lease contract before the agreed date

• Operating leases may appear as a liability on your balance sheet