The Equipment Lease
Smart Business Equipment Financing
The equipment lease was in its infancy 25 years ago. Today,
lease hundreds of billions of dollars worth of equipment each and every
Despite its popularity and widely acknowledged benefits, the equipment
lease remains a misunderstood business equipment financing technique.
Every entrepreneur and business owner should understand and consider
leasing as an excellent way for a company to finance equipment.
Because the useful life of the equipment is matched up with
the lease term, there is typically no down payment required. This 100
percent equipment finance option also can include service
additions like installation, maintenance, and other services needed for
your equipment to function properly.
Just about any type of commercial equipment can be leased. When you
lease equipment, you achieve greater purchasing power and flexibility,
since your business can obtain the best equipment available. The
payments are more affordable, and this form of business capital is
often easier to come by than other types of business financing,
particularly when starting a new business.
Smart Business Financing
tremendous leverage without
taking big risks!
With a one-page application and a couple of months of lease
your company can take control of equipment worth tens of thousands --
even hundreds of thousands -- of dollars, or more!
For the small business start-up, the equipment lease preserves precious
capital needed to establish the company and sustain it in the beginning
And for existing companies that have been able to build business
, leasing leaves that credit available for other business needs.
Capital preservation, crucial for any new or growing business, is just
one of the main benefits of the equipment lease. Being able to use the
equipment as much as you need without encountering the risks of
ownership is an added benefit to leasing. Your business won't have to
deal with depreciation of the item nor will your business have to worry
about the item becoming obsolete.
In addition, when you finance equipment using an equipment lease, your
business may receive tax benefits. Typically, 100 percent of your lease
payments are deductible as a business expense. So, depending on you
firm’s tax situation and the equipment you are acquiring, leasing might
be to your advantage when compared with equipment loans where only the
interest can be deductible. In many cases, leased equipment will be
cheaper after taxes than simply buying it outright with a traditional
Equipment Lease Terminology & Types
In your search for business equipment financing, you may hear some
unusual words and terminology:
Parties to an equipment lease
Your firm (the company acquiring the equipment)
A commercial equipment finance company that provides the
capital to acquire the equipment from one or more vendors on the
The company selling the equipment (sometimes referred to as the
“dealer,” particularly when titled equipment is involved).
- Lease Broker:
A company or individual that facilitates an equipment
lease transaction by matching the lessee to the lessor.
Equipment Lease Types
There are essentially four different types of equipment leases:
- Operating Lease
- Terminal Rental Adjustment Clause Lease (TRAC)
- Tax Lease/True Lease
- Capital Lease
Your understanding of these lease options will
help you select the best leasing solution for your business and for any
type of commercial equipment you need.
The operating lease, which closely resembles a typical automobile
lease, is usually a good choice for short-term equipment needs. It
allows you to lease needed equipment for a period that is shorter than
its expected life. Because you will return the equipment while it still
has functional value, the lessor may provide any maintenance and
insurance during your lease term.
Adjustment Clause (TRAC) Lease
Smart Business Financing Tip
An operating lease does not qualify as a Capital Lease (see
below), so it is not capitalized. As a result, you account for it as a
A TRAC lease provides the advantages of leasing while also giving the
lessee an option to purchase the equipment at the end of the lease term
at a price determined at the beginning of the lease – the vendor’s
forecasted residual value.
Flexible payment options make the TRAC lease an attractive way to
finance equipment, especially when starting a business. You are in
control of your monthly payments, which are tied to the forecasted
residual value at the end of the lease term. You can choose either a
low monthly payment in exchange for a higher end-of-term price, or
higher monthly payments and lower purchase price.
When a TRAC lease ends, you can:
Tax Lease/True Lease
- Continue to lease with a new lease based on the equipment’s
- Buy the equipment for the pre-determined price.
- Return the equipment.
- Replace or trade the equipment.
A low cost equipment lease option, the tax or true lease is ideal for
equipment that you expect to become obsolete quickly. Computer
equipment is a good candidate for this type of lease, since rapid
advances in hardware and software can mean short life cycles in your
When you lease equipment using a true/tax lease, you have use of it for
the term of the lease but no legal ownership
At the end of a tax lease/true lease, you will have the option to:
- Purchase the equipment at the fair market value
- Extend your lease
- Return the equipment
Capital leases and equipment loans are close cousins, but instead of
borrowing money, a company can use a capital equipment lease.to finance
equipment with a small initial investment and without depleting its
available credit. It is treated as a purchase for accounting purposes
and even though legal ownership of the equipment is not transferred to
you until the end of the lease period, you can treat the equipment as
an asset, claim depreciation, and deduct the interest expense. In other
words, when you finance equipment with a capital lease, your accounting
of it is the same as if you had borrowed money to purchase it.
Capital leases are best suited for equipment you will want to own and
retain at the end of the lease.
To qualify as a capital equipment lease for tax purposes, at least one
of the following must be true:
- Legal ownership is transferred to you at the end of the
- You have an option to purchase the equipment at a discount
at the end
of the lease term,
- The lease term is at least 75% of the estimated life of
- The discounted lease payments are equal to at least 90% of
market value of the equipment.
Working Capital Financing: Sale and Lease-back Programs
If your firm owns equipment outright, you may be able to access your
equity in it through a method of equipment refinancing known as a sale
In a sale and lease-back, you sell equipment to an equipment lease
company for cash and agree to lease it (as a lessee) on a long-term
basis using one of the lease types described above. Although
you have use and possession of the equipment, you may give up your
depreciation and tax benefits.
Choosing an Equipment Lease Company for Your Business
Once you have made the decision to lease equipment, you have to choose
an equipment lease company. Leasing comes in all shapes and
sizes and can vary widely in both the types of equipment and size of
the transactions they work with. A micro-ticket company, for
example, leases between $1,000-$25,000, whereas a large ticket lease
company usually deals with leases of $5 million or more. There are
computer leasing companies, companies that specialize in industrial
equipment, construction machinery, business vehicle financing, and so
on. If you don’t have the time or desire to search for your own
equipment lease financing, you can let a lease or commercial finance
broker do it all for you.
The equipment lease
Try to find a company who is a direct lender
and maintains their leases in their own portfolio. You will have a lot
more flexibility, particularly if you need to restructure your lease
during its term.
Also be on the watch for leases with prepayment penalties!
can be an important ingredient in any company’s
business financing strategy. Although it isn’t always the
solution when financing a business, leasing is certainly an easy and
flexible way to finance equipment without depleting cash reserves or
taking out loans.