Weighing Up on Equipment Leasing: How a Lease Can Benefit Your Business

If you are a business owner, you will know that one of your biggest operational expenses is equipment. Whether you are in construction, transportation, aviation, hospitality, or office and technology, equipment will most likely be one of the biggest expenses on your balance sheet. 

If you are starting up your business, chances are that you might not have the capital available to purchase new equipment outright, in fact, it is highly unlikely. Even if you are an established business, having to upgrade equipment, or replace something urgently might cause strain on your working cash-flow. 

This is where equipment leasing comes in. Not only can you kick your business off on the right foot, with the right equipment to operate successfully, but you can do so without as much risk of a loan. We took a look into equipment leasing. What it is, what the pros are, and whether it is something your business could benefit from. 

What is Equipment Leasing? 

Let’s start with a basic definition of what equipment leasing is. Essentially, equipment leasing is an equipment financing option that takes the strain of having to make a large one time purchase off your companies finances.

Leases, unlike loans, take a considerable amount of risk off the lender, and although they are similar to rentals, are in fact more complex. Leasing terms state that either the lessor or lessee owns the title of the equipment for the duration of the lease and that there is a portion of residual at the end of the agreed-upon period. 

The cost of the equipment will be equally spread out over the specific term, but some of the costs will be leftover at the end of the term. This could be as little as $1 or the fair market value of the equipment. 

You can also settle on two different leases; capital leases or operating leases. Capital leases essentially replace the concept of a loan whereby the lessor pays a last residual payment at the end of the term and owns the equipment. Operating leases, on the other hand, have shorter terms and bigger residuals, so you can opt to return the equipment at the end of the period, or buy it if necessary. 

With this in mind, let’s take a look at the benefits and downfalls of leasing equipment, and what may work for your company. 

Benefits of Equipment Leasing 

Less Upfront Cost of Equipment 

Not everyone has excess capital floating around to make a once-off purchase on a large item of equipment. In fact, not even the most established business has this capability. Day-to-day operations and expenses take up the largest part of the cash flow, and large purchase items like equipment are more often than not financed for the reduced risk to the cash-flow. 

The total cost of the equipment can be spread out in manageable chunks over a period of time, making it achievable to acquire the needed assets with minimal initial expenditure. You can work together with the asset financiers to work out the duration of the term, the monthly installment as well as interest rates to ensure that you are benefiting from the agreement. 

If you break the numbers down, it could make financial sense for you in the long run. Instead of laying out the full amount to buy the equipment, and put your company at risk. These payments can be spread over time, and the additional costs will be absorbed over time. 

Also, keep in mind the time value of your cash flow. A dollar in the present is worth more than a dollar in the future! 

They Are Easy to Qualify For

This could be one of the biggest advantages of leasing, especially for a start-up. Should you have little to no capital, having a credit score or collateral can be almost impossible. With leasing, the collateral is the equipment that you are financing, and lenders are more likely to agree to provide you with the contract. 

Because companies who sell large scale equipment know that their products are expensive to buy, they are more likely to provide you with the financing you need to acquire the equipment. In essence, they will actually lend you the money you need to buy their equipment. 

There are Numerous Tax Benefits 

Lease payments are in most cases considered tax-deductible as “ordinary and necessary” business expenses. From a financial reporting perspective, operating lease obligations will show up as liabilities, but the payments themselves are considered necessary for business operations and can be written off. In these cases, the short term of the lease means that it will not be considered a debt and you will not need to record the depreciation of the asset. These payments are usually 100% tax-deductible, which means that you end up paying even less at the end of the day on the equipment. 

It is important to get a tax consultant involved in your lease agreement to ensure that you gain as much benefit as you can from the lease. 

Leased Equipment Is Not Seen as a Risk to Investors and Other Creditors

In both operating leases and capital leases, the equipment will not be listed on your books as an asset. In the case of an operating lease, you will list it as an operating expense and, as mentioned, it will be tax deductible. 

Investors or lenders could see the purchased and depreciating equipment as a liability, and could be scared off, so you will be able to take advantage of that. If it is equipment you do not wish to own in the long-term, this will work out for you because you will be making yourself financially open to being provided lines of credit for something you might need in future. 

It Is Easy To Upgrade to Better Equipment 

If you operate in an environment that works with equipment that depreciates very quickly, this might be a better option for you. 

Whether you are a start-up or an established business, investing in new equipment does come with its risks. Not only might the equipment depreciate quickly, but you might find that the equipment becomes redundant over a period of time. 

With leasing, you can reduce the risk of losing money on equipment that you might land up not using in the long term. 

Take a look at leasing a printer, for example. This would be leased through an operating lease agreement with the lessor. A printer’s lifespan is usually around one to two years, before an upgrade comes along with better features. 

With an operating lease, you can complete the term with the lessor and either upgrade to a new printer or re-lease the existing one if it is still meeting your needs. You have the power to decide. 

There is Greater Flexibility 

Unlike loans or rentals, leases usually come with much more flexible terms. Not only are they much easier to obtain, especially as a start-up with little capital to your name, but contacts can be negotiable. Terms like payments, residuals, contract length, and ownership can be negotiated and agreed upon. 

Let’s also take down payments into consideration. The bigger the downpayment you are willing to put on the equipment, the more terms you can waive in the lease. Because leases are easy to qualify for, compared to other types of financing, a bigger down payment will leave you with more leverage. 

You Are Guaranteed Equipment for the Full Term 

When signing a lease, you are tying both yourself and the lessor into the lease for the full duration of the term. This means that even if your company is a start-up and has little credit, you will have the equipment, which can be used as collateral. The only way that you will lose the equipment is if you default on payments. 

If you are leasing operating equipment for a period of time, you will be paying set installments that cannot fluctuate and increase over the time. Most equipment has a set lifespan and lease periods can be determined according to that. 

It is highly unlikely that you will be paying more than the fair market value for the equipment, especially if you are working with leasing specialists. 

Last Thoughts

So, how do you know if leasing is right for you? The best option for you will be to do extensive research on equipment financing companies and set up meetings with each of them in order to establish what terms and conditions they can offer you. Once you have this information in hand, refer to a tax consultant and your financial team for their input. 

Leasing is a practice that shouldn’t be taken on by beginners. You will need the insights into the tax ramifications, as well as the long and short term risk appetite of your business. If you are a start-up, in particular, it could be worth your while hiring a tax consultant for the decision who will be able to advise you on the type of equipment you’re buying, tax codes, as well as the prevailing market values in order to get the most out of your lease.


What is Equipment Capital And How Your Business Can Take Advantage of It

If you are running a business or looking to start up a new business, you will know just how expensive it is to do so. You have to take everything into consideration including permits, registrations, employees, and naturally, equipment and resources. But if you are in the manufacturing, transporting, or servicing industries, those equipment costs can sky-rocket. 

Buying this kind of equipment can make a sizeable dent in your pocket, no matter the size of the business. Whether it is upgrading, replacing, or buying completely new, these vital components to your business can come at a hefty price tag. 

So, we took an in-depth look at equipment capital. What it is, how to raise it, and how it can come in handy for your business going forward.

What is Equipment Capital? 

Let’s start with the actual definition of equipment capital. These are the funds used to purchase and/or maintain the equipment needed to run or support the business. 

Capital is usually a long-term investment of sorts and is the owner’s equity portion of the investment. This capital purchase can be depreciated over a pre-defined useful life and expensed as operating expenses in the balance sheet. 

Because these assets have a lifetime of more than a year and are frequently used, they often come with maintenance plans or require regular maintenance. This is in order to get the best economical effect of their use in running the business. The capital required can often be quite substantial and unaffordable for a lot of companies, a reason why there are a number of options available to companies to raise this capital. 

You can consider the capital needed for equipment as working capital. These are the funds needed to maintain the operational expenses of a business on a month-to-month basis.

What Kind of Equipment Needs This Kind of Capital?

You may be wondering what kind of equipment we are referring to. The common term for these kinds of assets are in fact, capital equipment. This is crucial equipment that either supports the business or produces the commodities or products for the company. 

Each asset or bit of equipment needs to be valued at over $5,000 for it to fall within the capital equipment bracket and needs to have a useful life of over a year. Companies who frequently invest in these types of assets are either continuously expanding their operations or keeping up with technological advances. 

For smaller capital outlays and equipment under $5,000, it is usually encouraged to fund these via credit card facilities, business overdrafts, or term loans over financing or leasing options. The larger equipment that we are discussing is best funded by dedicated asset funders or funding facilities provided by the equipment/machinery manufacturer.

Capital equipment may differ across various industries, but includes assets like machinery, lifting systems, inventory transportation equipment or warehouse racks and trucks and trailers. 

How Do You Acquire Equipment Capital?

The next thing to look at is how to actually acquire this capital and get your equipment funded. As mentioned earlier, for anything over $5,000, you will need to look for something bigger than a normal loan. There are a number of companies that specialize in asset finance, which you can approach to finance your equipment. 

Some companies provide overall asset finance, and tailor packages for your needs, while others specialize in specific industries or for highly specialized equipment. One excellent example of this is the aviation industry. Due to the unique needs and operations, operators are more likely to approach aviation finance institutions than a non-specific company or even bank. 

In these cases, the institution has established relationships and partnerships with various industry-related suppliers and financial institutions in order to provide a full turn-key service to the company. This will usually mean that if there are maintenance requirements and costs on the equipment, it can be fulfilled by the supplier at an agreed-upon reduced cost, and will most likely fall within the maintenance plan.  

What Equipment Funding Options Do You Have?

The next thing to consider is what kind of financing option you actually want and can afford. You will usually have three options at the finance company. Each option comes with its own pros and cons and you will need to consider all before jumping in and choosing the first option presented. 

There are three ways asset financial institutions structure their loans for equipment capital; financing for a purchase, rental agreements or by providing a leasing option.

Asset Finance Loan 

The asset finance company can support you in actually purchasing the equipment by providing you with a loan which is tailored for your needs. Here, you will be able to agree with them on a specific installment, set term to pay it back as well as the interest attached to the loan. 

The term of the installments is usually set according to the lifespan of the equipment and can range from one year to five years.  So, if IT equipment depreciates over three years, the financier will usually set the term for around two years. 

It is important to keep in mind that while you are still paying off the installments, the lender will own the product and if you default or can’t continue paying the installment, they will have legal ownership of it and will be able to recover the outstanding amount from you. You will also not be able to sell the equipment while you are still paying for it. You will need to settle the remaining installments before selling the equipment on to someone else. 

You may also approach the financing company for the capital to assist with the other aspects of running your business. Not only can you purchase inventory, but you can use it to pay short term debts, run day-to-day operating expenses, and even pay wage shortfalls. 

In many cases, the financing company can tailor-make a package that will include a maintenance or service plan for the equipment. They will use their contacts of suppliers to assist you with the upkeep of the equipment.


The renting of an asset is a more temporary solution to your equipment needs. This is a form of acquiring equipment that is needed on a short-term basis by paying a set fee for that amount of time. Because of the high price of the equipment, and the short-term need for it, you can approach certain suppliers for rental contracts, to return it directly to them at the end of the period. 

The cost of the rental will usually be a lot higher than installments to pay it off as the supplier will need to recover the costs of buying the equipment themselves, as well as need to make a profit each time. 

So, when do rentals come in handy, you might be asking? It could be a great option when you need a very specialized and expensive piece of equipment for a few weeks or even months. Take a crane in construction into consideration. You might not need to buy one but need it for a certain project for a short period. 

Rentals also work in industries that are rapidly evolving when it comes to technology. The IT industry is a great example. In many cases, technology could overtake the equipment that you are using in under a year, and it makes more financial sense to rent. It is important to know that rental costs are expensed on the income statement for both accounting and tax purposes.


This is a contract similar to rentals where you rent equipment for a set period of time and according to certain terms. There are, however, more conditions that come with a lease contract, and the lessor is held to maintain the equipment in the contract. 

A lease is usually a long term contract and can last anywhere from a year to ten years. Unlike a payment plan and a rental agreement, there can be significant penalties should either party not hold up to their side of the contract. A lease can also result in what is known as a bargain purchase option in which the equipment can be bought for an amount that is significantly lower than it is worth. Keep in mind, the amount of the lease installments is usually inflated, so it ends up actually being worth it to buy it off. 

From an accounting perspective, leases typically fall into two main categories; operating leases and capital leases. This means that if the lease terms meet certain criteria, the lease will be considered capital. These terms include the fact that the lease payment needs to make up most of the fair market value of the asset. It will also need to make up most of the effective useful life of the asset, and there has to be a bargain purchase option.

How Can Equipment Capital Come in Handy For Your Business?

Now that we know the different options for financing your equipment, we thought we would touch on how gaining equipment capital can actually benefit your business in the long term. Apart from the fact you are investing in new equipment to keep your company running, it actually has several more advantages.

It can increase your working capital

When you opt to finance or lease your equipment, you do away with the hefty up-front payment of actually buying the equipment that you need. Making a large purchase like equipment will take a dip into the working capital and cash flow that your company needs to continue running. 

The fact is, and as COVID-19 has proven, you simply never know what is around the next financial corner, and having solid working capital available means that as a business owner, you can have funds available for operating costs as well as in an economic dip. 

You can stay up-to-date with the latest equipment

Let’s face it. Technology is evolving quicker than we can keep track of. Every single year there is an upgrade or a new addition to something that you are using, and in most industries, having the new technology and upgrade can mean getting quicker results more effectively and more efficiently. 

Having the financing option available means having access to new technology and equipment easier than buying equipment that takes a huge chunk of capital each time you make a purchase. 

There are huge tax benefits for financing your equipment

Keep in mind that when you take financing on something like equipment, the interest that you pay is tax-deductible. This means that you can write off a portion of your payment for your equipment when you submit your tax report.

What is more, should you be leasing the equipment, you can go as far as to write off the entire lease payment as a business expense, not just the interest paid as this is tax-deductible. The entire amount paid fo the equipment can be written off by deducting the monthly lease payments on the annual tax report.

Easy application process

Lastly, one of the key benefits of sourcing capital for your equipment is the ease of the application process. 

In most cases, approvals take around 24 hours and the process can be done online. The application takes around five minutes to fill out and once terms have been agreed upon, the equipment can be picked up and the finances will be left in the hands of the team. 

Wrapping Up 

The advantages of getting finance for your equipment are very clear. Not only is it efficient and easy to do, but it can assist with business continuation, especially during difficult times like COVID-19. Whether you are a new company or a start-up, equipment capital financing options are certainly available to keep you in business.