Types of Equipment Leases

Types of Equipment Leases

Equipment leases can be written for a variety of terms but typically range from 24 to 60 months. Most leases are monthly but quarterly and annual payment leases are also done.

Also available are step payments, wherein the lease payments start out low and increase each year; delayed payments, wherein the equipment can be installed and used for several months before the lease payments begin; seasonal payments, wherein the payment schedule can be set to match the seasonal cash flow of the business; and a variety of other customized terms. All of the above leases will fall into one of these broad categories:

True leases                                        

Sometimes called “tax” or “FMV” leases, these are designed to meet IRS tax guideline definitions of a lease and may offer you the fastest way to “write-off” the use of new equipment Leased equipment may be re-leased, purchased, returned or traded in at the end of the lease. Under a true lease, the lessor is the legal owner of the equipment. For that reason, this type of arrangement can be particularly attractive for companies and professional practices acquiring equipment that is vulnerable to technological obsolescence, such as computers.

A true lease gives you a lower monthly payment for a given piece of equipment than a finance lease would, and in some cases, your business can claim the lease payments as tax deductions.

You have three options at the end of the lease term. You may purchase the equipment for its fair market value, continue to lease it, or return the equipment to the lessor.

Operating leases

This type of lease can be designed to meet accounting standards for off-balance sheet financing according to FASB (Financial Accounting Standards Board) rules. The operating lease, popular for high-tech equipment that becomes obsolete quickly, has a term that’s shorter than the expected useful lifespan of the equipment.

An operating lease is generally for a short term (typically three years or less) and is often used with high-tech or other obsolescence-prone equipment. In this type of lease, the lessor typically takes a significant residual position in the lease pricing, thereby bearing more of the risk of ownership. This, in turn, allows a lower monthly payment for the lessee.

Operating leases may qualify for “off balance sheet” financing for the lessee, in that the lease is recorded neither as an asset nor as a liability. In addition, the lessee has no further obligation with respect to the equipment once the conditions of the lease have been fulfilled. As with a tax lease, the lessee usually is given the option to purchase the equipment at fair market value. You should check with your accountant to learn if your leasing arrangement can qualify as an operating lease.

Capital leases

Frequently called “$1-Buy-Out” leases, these transfer ownership for a token sum at the end of the lease. They’re basically a sales finance type contract. They offer the convenience of leasing for those not needing the full tax deductibility of their lease payments.

Finance Lease (also called a “Capital Lease”):

The finance lease combines some of the benefits of leasing with those of ownership. Payments are spread over a period of several years and often represent the full value of the equipment.

The advantage of a finance lease is that you have the opportunity to own the equipment at the end of the lease, generally for a minimal payment, such as $1.00, or for a small percentage of the original equipment cost.

Sale-Lease-Backs

In this type of lease, the lessor purchases the leased equipment from the lessee who leases it back from the lessor and continues to use it. It’s an effective way to free up working capital which may be tied up in fixed assets.

Skip Payment Lease:

A skip lease has a repayment schedule that includes months when no payment is made (and no penalty is assessed). Ideal candidates for this type of lease are organizations that need a flexible repayment schedule such as seasonal businesses (agricultural or recreational services firms, for instance) and school systems.

Deferred Lease:

A 60, 90 120-day deferred lease can be structured as a finance lease or a true lease. There is usually one advance payment required, and the next payment is not due until the second (60-day) or third (90-day) month of the lease. The Deferred Lease is a deferred payment program; you’ll have 30, 60, or 90 days to use the equipment before your first payment is due.

This structure is useful for businesses that acquire income-producing equipment that takes a few months to begin generating revenue. The Deferred Lease is a popular choice for businesses that are acquiring income-producing equipment and need some time for the equipment to earn its keep. Have you ever heard the objection, “It’s not in this year’s budget,” or, “I don’t have the money right now”? At the end of the Deferred Lease, you can choose from various buyout options.

Additional equipment leasing benefits:

• $99 for the First 6 Months: Get started with minimal upfront costs.
• 90-Day Deferred Payments: Pay nothing for the first three months.
• $0 Down Payment or $0 Security Deposit *OAC