In order to leverage the benefits of equipment leasing, you need to make sure that you are choosing the perfect type suiting your company. You need to be aware that you are going for equipment lease only and not falling into the trap of a few leases that turn out to be equipment loans. Start by getting thorough with the lingo that is used by the equipment leasing companies which will help you to choose the correct company or vendor.
Among the various types of equipment leasing, the major two types are:
Capital Lease/ Finance Lease
These leases have an advantage of fixed monthly payments and companies usually end up buying the equipment at the end of the lease. A few key points of Capital lease are:
- The lessee holds complete control of the equipment and is considered the owner until the lease period ends.
- The lessee can record the equipment in their balance sheets as assets and use lease payment for liabilities.
- The fixed monthly payment of capital lease is higher and ends up being similar to equipment loan.
- Lessee holds the right to depreciate the equipment value if they wish.
True Lease/ Operating Lease/ Fair Market Value Lease
In True lease, the company has to make fixed monthly payments, comparatively lower. This lease is often taken into consideration for the equipment that needs frequent upgrades. Things to consider about True lease:
- The lessee does not hold complete ownership of the equipment
- The lease period cannot exceed 75% of the equipment’s total life
- The lessee has an option to either return the equipment or renew the lease with the same or upgraded equipment
- The lease payment cannot exceed 90% of the equipment’s fair market value for the lessee’s incremental borrowing cost.
These were just the major types of equipment lease which have further bifurcations too. While selecting the type of lease you have to keep your business goals in focus. Go for capital lease if you are planning to buy the equipment and operating lease if you want to keep low monthly payments bounded.