Leasing is a common form of business financing, usually used for equipment and vehicle purchases. Using an equipment lease calculator can help you get a clear idea of how much a lease will cost.
Why is leasing important? Because it can save you money in the long run, both on financing and on income taxes. Below are our top seven things business owners need to know about equipment leases.
An equipment leasing calculator is a great way to compare the costs of a lease versus a loan.
With our calculator, you can enter in the terms of your financing for both the lease and the loan. The calculator then shows you what your monthly payments are and the total cost over time.
It's a great way to explore your equipment financing options. It also allows you to figure out the value of the equipment over time.
That way you can decide if you'd rather do a $1 purchase option or do a Fair Market Value (FMV) lease buyout.
If you aren't familiar with these terms, don't worry, keep reading this guide for your crash course in equipment leasing.
$1 purchase option. Fair market value. 10% buyout. What?!
If these terms sound foreign to you, then you've got a thing or two to learn about equipment leasing. Especially if you're a business owner.
First, let's define the lease itself. Leases come in a variety of forms.
Many people think of leasing in reference to property. For example, signing a lease on an apartment or on a commercial space.
When you sign a lease, you agree to use an asset that belongs to another person or entity. You lease an apartment that belongs to someone else and live in it until the terms of the lease are over.
At the end of the lease, the owner expects that you renew the lease or vacate the property.
The same is true for equipment leasing.
You've started a printing business and you need a copier. Since you're new to the business, you don't have the money to buy the copier outright. So you decide to lease the machine for 12 months.
When the lease is up, you'll have the option to continue leasing the copier or return it to the copier company.
First, you get a top-of-the-line copier with very little capital. An equipment lease usually requires no down payment. If you were to finance using a traditional loan, you might need to put 10% down or more.
Second, copiers are like computers in that technology moves fast. To stay up-to-date with the copying trends, you'll want to upgrade often. The lease option allows you to return the copier and get a newer one at the end of 12 months.
Finally, the lease might give you tax benefits that a purchase wouldn't. We'll go over this in more detail later in this article.
As a business owner, you need to have cost-effective options for obtaining new equipment. Without the necessary tools of the trade, your business can suffer.
Leasing works well for businesses that need to upgrade equipment regularly. Like our printing shop example, many businesses use equipment that relies on software.
Any equipment that uses software becomes obsolete sooner than other types of equipment. Some examples include computers, printing equipment, cameras, medical equipment, and specialized manufacturing equipment.
Leasing makes sense with this type of equipment. You can trade-in the equipment to the manufacturer when the lease ends. Then you can lease newer equipment more frequently.
New businesses or businesses with very little cash like leasing for this reason. In most cases, you need little or no down payment.
You can lease to own. Meaning your lease payments go toward buying the equipment. Many companies take advantage of this as an alternative to straight out buying when equipment holds it's value well.
Leasing is helpful when you're looking for a lower monthly payment. Like the 12-month lease in our example above. The copier has a lower payment than you would get if you financed the purchase with a loan.
If you're planning to buy a new vehicle and don't want a high monthly payment, leasing is the way to go.
Also, leases are flexible. Let's say you want a low monthly payment. But you still want your payments to apply to the purchase price. Then you can consider something with a buyout at the end.
Yes! In fact, tax benefits are one of the primary reasons businesses choose to lease instead of buy.
When you enter into a lease, you don't actually own the equipment. You pay a monthly rental payment to use the equipment. The accounting for this is different than accounting for an equipment purchase.
Financing or buying business equipment goes on your company balance sheet as an asset and liability. A lease is an off-balance sheet financing option.
Also, lease payments let you deduct the entire payment from income every month. This lowers your taxable income. Versus a loan payment where you can only deduct the monthly interest paid.
Always check with your tax preparer (CPA) before you finance equipment. See if they think leasing is a good option to save you some tax money.
There's a difference between a lease that allows you to rent equipment over time and lease-to-own.
Some leases are meant to be short-term. Meaning you agree to make a certain number of payments. Then either renew the lease or return the equipment.
Lease-to-own options always have a specified buyout. This buyout is what you pay for the equipment when the rental part of the lease is done. Some of the most common lease buyouts are $1, 10% of the purchase price, or fair market value (FMV).
The 10% purchase option is used less often than $1 purchase option and FMV. You buy the equipment for 10% of the original price at the end of the lease. This lets you have a lower payment and a fair buyout.
An FMV lease means that you pay fair market value for the equipment when the lease ends. Fair market value depends on the equipment.
Some equipment holds its value well, other equipment doesn't. And the value is figured at the end of the lease.
Say you're leasing a medical imaging machine that costs $10,000 for 12 months. You know the machine will be worth $5,000 after those 12 months. At the end of the lease, you'll decide if you want to pay $5,000 for it after 12 months of use.
Many people see the verbiage of a $1 buyout lease and think, what the heck is the point of that? Why would a lease require me to pay $1 when it's over?
This type of lease is a way to buy, yet still, lease. It means that you'll finance the entire cost of the equipment over the term of the lease. But at the end, you'll pay $1 and own the equipment outright.
A $1 buyout is good if you want the tax benefits of a lease payment, but you also want to buy the equipment. You can then fully pay off your lease during the initial term.
Many businesses don't have the capital to buy the equipment they need outright. That's why the equipment lease is such a helpful option.
Using our free calculator is a great way to help you decide on the financing option that's right for you.
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