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Equipment Leasing

Get the facts on leasing before you sign on the dotted line.

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Equipment leasing has become an increasingly popular option for companies that are looking to acquire new equipment.

In fact, according to the Equipment Leasing Association, as many as 8 out of 10 U.S. businesses choose to lease at least some or all of their equipment.

A lease lets you pass the buck--at least for a while. A third party funding source (the lessor) will purchase the equipment you want on your behalf. You (the lessee) can use the equipment in exchange for regular payments made over a contracted period of time.

This guide is designed to give you the facts you need to lease equipment for your business. The various sections are listed in the box above. You can choose to read this guide from beginning to end, or jump directly to a section of interest.

Advantages of Leasing

One of the greatest advantages of leasing is that it offers fairly minimal upfront costs. Unlike bank loans that may require a substantial down payment, two advanced payments are generally all that are required at the beginning of a lease.

In addition, leasing protects against equipment obsolescence by forcing you to evaluate the useful life of the equipment that you intend to lease and to set lease terms accordingly.

Finally, leasing can lessen the burden that taxes have on your company's wallet. Depending on how your lease is structured, you may be able to fully deduct lease payments as a business expense as opposed to depreciating the value of the equipment as if it were a capital expenditure.

What's Included

While virtually all lessors will lease tangible equipment, not all are willing to add soft assets to the lease. Examples of "soft" or "intangible" assets include software, warranties, service, training, installation, and shipping costs.

Why is this? From a lessor's standpoint, it's much easier to repossess a computer or copier in the event that you default as opposed to software or shipping costs.

You'll want to make sure to inquire early on about your lessor's policies if soft asset financing is important to you.

Get free quotes on leasing services from BuyerZone.com.

Types of Leases

Although they come disguised under many names, you'll find that there are basically two types of leases: finance and true.

Finance leases
Also known as capital lease, conditional sale, or dollar buy out, these leases work best if you intend to keep the equipment at the end of the lease. The main advantage of this type of lease is that it gives you the option to purchase the equipment for a nominal fee, usually $1.00. Payment terms on finance leases tend to last close to the expected useful life of the equipment.

True leases
True lease payments (a.k.a. tax-, operating-, or FMV-lease), on the other hand, do not usually span the full expected life of the equipment. At the end of the lease, you can choose to walk away from the equipment or purchase it at fair market value. Payments on true leases generally tend to be lower than those on finance leases. This is because lessors have the opportunity to resell the equipment when the lease ends.

Tax Implications

One of the main benefits of true leases is that you may be able to fully claim lease payments for tax purposes.

In contrast, finance leases are usually regarded by the government as an installment purchase plan in lease clothing. As a result, although finance leases let you spread your payments over time, they are not tax advantaged in the way true leases are.

Make sure to discuss the tax implications of your lease with an accountant before signing any contract.

Leasing Providers

You can turn to a broker, captive leasing company, or independent lessor to handle your lease.


A broker acts as the middle-man between you, the lessee, and the funding source (e.g., bank or financial services company) that agrees to finance the asset.

Captive leasing company

As a subsidiary leasing arm of a manufacturer or dealer, a captive leasing company's main purpose is to provide leasing to its parent company and/or dealer networks.

Independent lessor

Independent lessors are funding sources that lease directly to businesses.

Payment Options

While fixed monthly payments are the norm, they are not your only option. Depending on your company's financial situation, there are several payment plans that may be more appealing.

If your company's cash flow ebbs or flows depending on the season, then you might want to consider a skip lease repayment structure.

Skip leases allow you to skip payments during slow months without being penalized. They are ideal for recreational and agricultural businesses that rely heavily on certain times of the year for revenue generation.

Step-up leases provide a solution for companies with limited cash and that are dependent upon the acquisition of specific equipment to increase revenue. This type of lease recognizes that the company will be able to handle increased lease payments over time.

An alternative to a step-up lease is a 60- or 90- day deferred lease. Just as its name implies, this lease allows you to defer your first payment for 2 or 3 months. Usually you will not have to present a down payment with this option.

Ending Your Lease

Lease terms range anywhere from 6 to 120 months, although the majority fall between 12 and 60 months.

The lease term that you decide upon will depend heavily on what you decide to do with the equipment at the end of your lease. Usually, you have four choices. You can:

  • return the equipment to the lessor with no future obligation.
  • renew the lease.
  • purchase the equipment for a nominal fee or fixed price agreed upon at the lease inception.
  • purchase the equipment at fair market value.

Lease Shopping

Now that you've picked out equipment and decided to lease, its time to get quotes. Two to four quotes can give you a good sense for what the market is charging.

Before you shop around for quotes, be prepared to provide the following information: The cost of the equipment, the length of the lease, and whether or not you will purchase the equipment at the close of the lease.

When shopping around for quotes, it's important to make sure you are comparing apples to apples. For instance, has the quote been calculated based on two advanced payments and a security deposit, or on one advanced payment alone?

Even though quotes are not 100% exact (a credit check needs to be done first to be certain), they are usually pretty accurate. In the end, payments may go up or down depending on how good your credit turns out to be.

Applying for a Lease

While you should feel free to shop around for quotes, don't complete a lease application unless you are absolutely sure that you'll lease through them upon being approved.

That's because each credit inquiry shows up on your credit report, and excessive inquiries damage your chance of being accepted or approved for the best credit rating.

After you've submitted your application, an answer won't be far out of reach. On average, it takes only 3-48 hours to find out whether you've been accepted.

Negotiating Tips

Lower the purchase price

Since equipment leasing generally involves straight financing, the best way to lower your lease payments is to bring down the purchase price of the equipment you intend to lease.

Lower the rate

Another way to lower payments is to negotiate a lower rate. Rates for small ticket leasing (under $100,000) go across the board and range anywhere from 10-19%, depending on such factors as credit worthiness, the size of the lease, and the area that you live in. You'll find that middle and large ticket leasing tend to be more competitive at 6-8%. On average, brokers tend to make 3-5% above the rate given by the funding source.

Drop the soft assets

Lastly, calculate your lease with and without the soft assets. Although it may be more convenient to pay one bill every month, you'll probably be able to save hundreds, if not thousands of dollars by cutting out the soft assets.