Types of Equipment Leases: Definition, Types, and More

Overview:

Capital Expenditures are important for the growth and expansion of the company. They require considerable planning and resources that need to be utilized.

Organizations need to ensure that they can finance this capital expenditure relatively easily.

Since companies do not always have sufficient resources to finance these operations internally, they must arrange for this equipment using an alternate strategy.

The best course of action in this regard is mainly leasing equipment for the company.

Definition of Equipment Lease

An equipment lease can be defined as a contract that is signed between two parties (the owner of the asset and the user of the asset) to give the right to the user to utilize the asset for a specific period against a fixed amount as a return to the owner of the asset.

Equipment leases allow companies to procure their assets without worrying about arranging an upfront payment to finance the equipment cost.

In typical lease contracts, two parties are involved: the user of the asset and the owner of the asset.

In exchange for using the asset, the owner gets a certain return, which is his incentive to invest in the particular capital asset on behalf of the company.

There are two main equipment leases: Operating Leases and Capital Leases. Other subcategories of equipment leases include Lease Back Agreements and Trac Leases.

Types of Equipment Lease

1) Operating Lease

An operating Lease is perhaps the most popular category of equipment lease. It allows the asset user to utilize it for some time shorter than the asset’s life.

These leases are relatively short-term and mostly expire within a window of 12 months. For an equipment lease, examples of an Operating Lease might include vehicles, cold stores, and machinery for order fulfillment.

Under the contract signed under an operating lease, the owner gives the right to the asset used to use the asset for the agreed-upon.

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During this timeline, the ownership of the asset tends to remain with the asset’s owner.

In this regard, it is also important to highlight that the asset’s legal ownership stays with its owner.

The ownership is not transferred, regardless of the user’s physical asset possession.

The user can cancel equipment extended for usage under the Operating Lease Agreement at any time.

2) Capital Lease

Capital Leases, unlike Operating Leases, are relatively long-term in nature. They are mainly used for equipment that is high-value and is used for a considerable time frame.

In the case of a Capital Lease, the ownership of the asset is also transferred to the user of the asset.

After the end of the lease period, the lessee (user of the asset) also has the option to buy the asset.

Therefore, a lease in this regard is considered a loan that is extended to the lessee against the equipment purchased.

Examples of equipment involving capital leases include heavy machinery, ship, and plant purchase.

It is also represented as a loan (Long Term Liability in the Financial Statements of the agreement.

3) Lease Back Agreement

A lease Back agreement constitutes using an asset to leasing back the asset from the buyer.

Therefore, in this type of lease, it can be seen that the seller of the asset becomes the lessee, whereas the buyer of the asset becomes the lessor.

Companies mostly do this when they need cash to finance their expenses and they need to use the equipment too.

Therefore, it is considered a highly useful resource when a company has an asset that can be sold in exchange for cash.

The contingency in this regard is simply the fact that there is a need to ensure that companies have assets that can be presented for sale.

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In the same manner, they should also have a buyer who is interested in agreeing.

Top 10 Companies that Offer Equipment Leases

If you want to learn more about equipment leases, here are the top 10 companies you can explore.

  1. CIT Group Inc provides equipment leasing and financing for businesses, offering traditional and innovative financing solutions.
  2. Wells Fargo Equipment Finance specializes in heavy-duty truck, railcar, and marine equipment lease financing for businesses of all sizes.
  3. Direct Capital has been offering small business equipment leasing for over 20 years, helping entrepreneurs access the tools they need to succeed.
  4. Balboa Capital offers various commercial equipment leasing options, including start-up programs, construction loans, and purchase order financing.
  5. U.S. Bank Equipment Finance supports small to large businesses by providing flexible, customized solutions for their equipment needs.
  6. Lease Corporation of America helps companies finance their short-term or long-term equipment needs with tailored solutions that fit their budget and timeline requirements.
  7. Regions Equipment Finance provides attractive terms on an array of capital expenditures such as technology, furniture & fixtures, vehicles, medical/dental services, etc
  8. FlexiCapital is committed to providing quick approval times and competitive rates regarding business loan and equipment leasing options 9. Great American Leasing Company awards clients with fast approval rates on its extensive catalog of commercial-grade equipment
  9. Castleflex National Leasing is a nationwide provider of lease financing services dedicated to meeting the needs of each customer’s unique situation through individualized service tailored to meet their objectives precisely.

Top 9 Reasons Why You Should Not Equipment Leases.

  1. Unfavorable Terms – Equipment leases often involve unfavorable terms for the borrower, such as high-interest rates or long-term contracts.
  2. Limited Availability – Leasing may not be available in all circumstances, as some lenders only offer leasing options to established businesses or those with a specific credit score.
  3. Unexpected Costs – Unlike loan payments, lease payments are subject to unexpected charges, which can add up quickly and make it difficult to budget accurately.
  4. Risk of Default – If you don’t pay your lease payments on time, you risk defaulting on the lease which could lead to legal consequences or a hit to your credit score.
  5. Lack of Ownership – When you lease equipment, you don’t own it — instead, ownership remains with the leasing company until the end of the term. This means that you cannot customize or upgrade the equipment without getting permission first from the leasing company.
  6. Short-Term Solution – Leasing is best suited for short-term needs as it’s not always cost-effective over a more extended period due to increasing costs associated with renewing at regular intervals (usually 2-3 years).
  7. Early Termination Penalties – Some leases require that you pay an early termination penalty if you terminate before the end of the term – this can be expensive depending on how much is left in remaining payments and any other fees associated with terminating early.
  8. Credit Score Impact – Applying for an equipment lease can impact your credit score temporarily due to inquiries about your financial status during the application process.
  9. Tax Implications – The terms of each lease agreement may vary, but depending on how your lease is structured, there may be tax implications that could affect your return filing obligations down the line.
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Conclusion

Hence, it can be seen that equipment leases can be regarded as an extremely viable resource that can help companies to carry out capital expenditures without having to worry too much about financing.

Even though cumulatively, it often costs higher than a lump-sum purchase of the given asset, it saves the organization from a liquidity crunch.