For many companies, equipment leasing can prove a valuable means of obtaining and operating equipment. Equipment leases are typically categorized into operating leases and capital leases, both of which function similarly to a loan.
With capital leases, businesses generally own the equipment on paper. This means that the equipment’s assets and liabilities are placed on the business’s balance sheet. A capital lease is often the best option for a business seeking to purchase equipment that will serve as a long-term asset. Examples of these leases include the $1 buyout lease and the 10% option lease.
The $1 buyout lease is similar to a loan, wherein the business will contribute monthly payments to use the equipment. In accordance with capital leases, this lease treats the business as the owner of the equipment; the assets and liabilities are placed on the business. While these payments are often higher than other capital leases, businesses can opt to buy and own the equipment for $1 after the lease has ended. This type of lease proves economical for maintaining and obtaining equipment with a long shelf life that won’t lose considerable value over time.
Another example of a capital lease is the 10% option lease. Similar to the $1 buyout lease, the 10% lease treats the business as the owner and provides businesses the option of owning the equipment throughout the lease. While this payout comes at 10% of the equipment’s cost, it offers lower monthly payments than the $1 lease.
An operating lease is another form of an equipment lease. In this lease, the lender owns the equipment, leaving the equipment off of a business’s balance sheet. This approach proves useful for businesses looking to finance an equipment with a short shelf-life or equipment a business plans on replacing after the lease is up. An example of the operating lease is the Fair Market Value Lease.
Like the aforementioned loans, the Fair Market Value Lease allows businesses to make monthly rental payments for access to the equipment. Similar to other lease options, the FMV lease also provides a payout option at the end of the lease; however, businesses will have the opportunity to purchase the equipment at its fair market value, a value determined by the leasing company. In addition to this payout option, businesses can also choose to renew the lease or return the equipment. This lease often offers lower monthly payments and is ultimately recommended for technology or other equipment that may have a short shelf life and become obsolete quickly. Unfortunately, a FMV may be difficult for smaller businesses to qualify for, as it places more risk on the equipment leasing property and requires better credit profiles than other leasing types.
When it comes to considering an equipment lease, there are many things to consider. If a business is looking to purchase equipment after leasing, it is recommended it pursue a capital lease. For equipment that may become quickly obsolete or a business that needs to stay up to date with equipment upgrades, operating lease options may prove most beneficial.