What is Equipment Leasing?
Equipment leasing is a form of asset finance that allows a business to use a piece of equipment, such as a vehicle, machinery or IT hardware, in exchange for regular payments over a set period. Instead of buying the asset outright the business is essentially renting it from the finance provider. This method is often favoured by businesses that need access to modern or expensive equipment but want to avoid the significant upfront cost of a purchase.
The core principle of leasing is that ownership of the equipment remains with the finance company, while the business has the right to use it for the duration of the lease agreement. The agreement will clearly outline the terms, including the length of the lease, the payment schedule and the options available to the business at the end of the term.
For small and medium-sized businesses, leasing can be a way to acquire the tools they need to operate and grow without putting a strain on their working capital and spreading the costs over time, making high-value assets more accessible. This can also be a useful option for equipment that may become outdated quickly, as it allows a business to regularly upgrade without selling older assets. Leasing usually factors in depreciation and maintenance which can make it a more stable financial commitment.
The Different Types of Equipment Leasing
There are a number of different types of equipment leasing and the choice depends on a business’s specific needs and its long-term plans for the equipment.
Operating Lease
An operating lease is much like a straightforward rental agreement. The business pays for the use of the equipment for a fixed term and at the end of the term the equipment is returned to the finance company. The lease period is shorter than the full lifespan of the asset and the payments often include maintenance and service costs. This makes it a suitable option for equipment that a business only needs for a short period or for assets that are likely to depreciate quickly, such as certain types of technology. Because the asset is not on the business’s balance sheet, it can offer a tax-efficient way to acquire new assets.
Finance Lease
A finance lease is a longer-term agreement where the business takes on the benefits and risks of owning the asset, even though the finance company retains legal ownership throughout the lease term. At the end of the lease, a business often has the option to purchase the equipment for a fee, continue renting it for a reduced rate or sell the asset to a third party on behalf of the lender and retain some of the proceeds. This option is often used for equipment with a long lifespan, like heavy machinery, where the business intends to use the asset for many years.
Hire Purchase
A hire purchase agreement is a form of asset finance that is similar to leasing but with a different outcome. It involves an initial deposit followed by regular payments over a set period. At the end of the term, once all payments have been made, the business gains full ownership of the equipment. This is a good option for businesses that want to spread the cost of a purchase over time and eventually own the asset outright.
Leasing in the Context of Business Finance
Equipment leasing sits within the broader category of asset finance, which is distinct from other forms of business funding like loans or overdrafts. A traditional business loan provides a lump sum of cash that can be used for any purpose, while an equipment lease is specifically tied to the acquisition of a particular piece of equipment.
One of the key benefits of leasing over a traditional loan is that it can help preserve a business’s cash flow. Instead of a large upfront or higher monthly repayments, costs are spread out in predictable, fixed monthly payments making it easier to budget. This also frees up a business’s working capital, which can then be used for other operational needs, such as marketing, stock or hiring new staff.
For businesses that may have a limited credit history, leasing can sometimes be easier to secure than a traditional loan, as the asset itself acts as security for the finance provider. The finance company owns the equipment, which reduces their risk. Ultimately, the choice between leasing, hire purchase, or a traditional loan depends on a business’s financial situation, its long-term plans for the equipment, and its desire for ownership versus the flexibility of a rental agreement.
Equipment Leasing Loans FAQs
Is equipment leasing the same as buying a piece of equipment with a loan?
No, they are different. When you buy equipment with a loan, you own the asset from the start. With an equipment lease, the finance provider owns the equipment and you are essentially renting it. The main exception is a hire purchase agreement, where you make payments over time and gain ownership at the end.
Is a business required to put down a deposit for equipment leasing?
This depends on the specific agreement. Some leasing contracts, particularly hire purchase, may require an initial deposit while others may not. The need for an upfront payment is a point to clarify with a potential finance provider when exploring your options.
What happens to the equipment at the end of the lease?
At the end of an operating lease agreement, the equipment is returned to the finance company. With a finance lease, a business may have the option to buy the asset, sell it on behalf of the lender or continue to rent it. The specific options will be outlined in the initial agreement.
Can I get a lease for any type of equipment?
Most types of business equipment can be leased. This includes “hard assets” like machinery, vehicles and construction equipment, as well as “soft assets” like IT hardware and office furniture. The value of the asset will be a factor with some lenders having a minimum value for the equipment they are willing to finance.
Are there tax benefits to equipment leasing?
Yes, equipment leasing can offer tax benefits for a business. In many cases, the monthly payments can be treated as a business expense and therefore deducted from the business’s profits before corporation tax is calculated. It is advisable to speak to a tax adviser to understand how it applies to your specific circumstances.