Looking to lease equipment for your small business? Equipment leasing provides access to business assets through financing options with monthly payments.
From application process to leasing terms, this guide covers how equipment leasing works for small business operations, helping you compare costs and understand payment structures.
By exploring leasing agreements, financial terms, and business equipment options, you'll learn about the steps involved in equipment financing and what to expect during the application process.
We examine payment structures, lease requirements, and cost comparisons to give you practical insights into business equipment leasing decisions.
Small Business Equipment Leasing: Understanding Your Options
Getting the right equipment for your business doesn’t have to mean a big upfront investment. Equipment leasing offers flexible solutions that allow you to access the tools you need without straining your budget.
Let’s explore the different types of leases available and see how they compare to traditional business loans.
Types of Equipment Leasing for Small Businesses
Leasing comes in different forms, so it’s good to know what’s available. Each option has its benefits depending on your business goals and cash flow needs:
- Operating Leases
This type of lease is ideal if you only need equipment for a specific period. It works well for items that might become outdated quickly, like technology or machinery. At the end of the lease, you can simply return the equipment without any obligation to buy. - Finance Leases
A finance lease is more like renting-to-own. You’ll make regular payments over time, and by the end of the lease term, you’ll often have the option to purchase the equipment for a reduced price. It’s a good choice for long-term assets. - Capital Leases
This option is suited for businesses looking to eventually own the equipment. Payments are higher, but you gain ownership once the lease ends. It’s a practical option for assets with a long lifespan. - Fair Market Value (FMV) Leases
An FMV lease lets you return the equipment at the end of the term or buy it at its fair market value. This flexibility is helpful if your needs change over time.
Each of these leases can be adapted to fit various industries, from construction to retail.
Equipment Lease vs Business Loan: Which to Choose?
When acquiring equipment for your business, you can choose between leasing or taking out a loan. Below are the main differences to help you decide based on your priorities.
1. Initial Cost
- Leasing: Generally, leasing requires little to no upfront payment. You rent the equipment and pay monthly installments. This can be easier on your cash flow, especially if you’re just starting or have a tight budget.
- Loan: With a loan, you purchase the equipment outright. This often involves an initial payment (down payment), which can represent a higher upfront cost.
2. Ownership
- Leasing: You don’t own the equipment during the lease term. At the end of the contract, you might have the option to purchase it, but it’s not guaranteed.
- Loan: You own the equipment from the start. This means you can use and modify it as needed, without restrictions.
3. Flexibility
- Leasing: Ideal for equipment that may become outdated quickly, such as technology or specific machinery. At the end of the contract, you can return the equipment, renew the lease, or purchase another one.
- Loan: More suitable for durable equipment that you plan to use for a long time. However, you’re committed to repaying the loan even if the equipment becomes obsolete.
4. Monthly Payments
- Leasing: Monthly payments are often lower because you’re paying for usage rather than full ownership.
- Loan: Monthly payments tend to be higher because they include repayment of the principal amount and interest.
5. Usage Duration
- Leasing: Best for temporary needs or equipment you’re unsure about keeping long-term.
- Loan: Ideal if you plan to use the equipment for several years and want full ownership.
How do interest rates and lease terms affect overall cost?
- Interest Rates:
- For loans, higher interest rates increase the total repayment amount. A lower rate can significantly reduce long-term costs.
- Leasing doesn’t have traditional interest rates, but implicit financing costs can make the total lease payments higher than the equipment’s purchase price.
- For loans, higher interest rates increase the total repayment amount. A lower rate can significantly reduce long-term costs.
- Lease Terms:
- Shorter leases often have higher monthly payments but can save money if you plan to upgrade frequently.
- Longer leases reduce monthly costs but might lock you into a contract even if the equipment becomes outdated.
The overall cost depends on the structure of the lease or loan, the length of the agreement, and the financial terms negotiated.
What types of equipment can be leased?
Leasing is available for a wide range of equipment across various industries, including:
- Technology: Computers, servers, and software.
- Construction: Excavators, cranes, and bulldozers.
- Healthcare: Diagnostic machines, medical devices, and lab equipment.
- Office: Printers, copiers, and furniture.
- Retail: Point-of-sale systems and displays.
- Manufacturing: Production machinery and tools.
Most equipment that depreciates quickly or has a high upfront cost is a good candidate for leasing.
How can a small business qualify for leasing?
Small businesses can qualify for leasing by meeting the following requirements:
- Creditworthiness:
- Lenders and leasing companies evaluate the business's credit score and financial history.
- A solid track record of revenue and timely payments improves approval chances.
- Business Age:
- Established businesses with a longer operating history are more likely to qualify.
- Startups might need to provide additional documentation or a personal guarantee.
- Cash Flow:
- Demonstrating consistent cash flow assures the lessor of your ability to make payments.
- Demonstrating consistent cash flow assures the lessor of your ability to make payments.
- Down Payment (Optional):
- Some leasing companies might ask for a small down payment or security deposit, though many offer 100% financing.
- Some leasing companies might ask for a small down payment or security deposit, though many offer 100% financing.
- Specific Documentation:
- Be ready to provide financial statements, tax returns, and business plans if requested.
