Equipment Leasing Defined
Equipment Leasing is obtaining the use of a piece of Equipment for example an Excavator, Bulldozer, Highway Truck and Trailer or Medical Equipment on a “rental basis”. Ownership rests with the Financial Institution or Leasing Company, while you the business owner has the actual use of the asset.
Equipment Leasing (Capital Leases and Operating Leases)
Leasing is like borrowing, however in a lease, it’s the lender that purchases the equipment and then leases (rents) it back to you for a flat monthly fee—sometimes lower than the payment on a loan would be. Most equipment leases come with a fixed interest rate and fixed term, but interest rates and terms can vary depending upon the leasing company and your credit profile. You can expect to see anywhere from low single digits to double digits, so it makes sense to shop around before you commit. At the end of the lease, you may be able to purchase the equipment at fair market value, or a predetermined amount—sometimes even as little as one Canadian Loonie $1.00, depending upon the lease structure.
As Equipment Finance Broker we provide a service to both our Vendor Partners and End-Users (Lessees) as we become the conduit between the Funding Underwriters and the client. You the business owner or senior management official can concentrate on your business at hand without the burden of trying to source the capital for that specific requirement.
“What’s the fundamental differences between a Capital Lease and Operating Leases?”
Capital Leases vs Operating Leases
A capital lease (or finance lease) is treated like an asset on a company’s balance sheet, while an operating lease is an expense that remains off the balance sheet. Think of a capital lease as more like owning an Equipment Asset and think of an Operating lease as more like renting an Equipment Asset. There are significant differences between a capital lease vs operating lease, and this guide will help you understand the difference between the two types of leases and their respective accounting treatment.
Accounting Treatment: Capital Lease vs Operating Lease
Capital and operating leases are subject to different accounting treatment for both the lessee and the lessor. For the purpose of entry-level finance interviews, it is enough to understand the accounting treatment for the lessee only.
Accounting for an operating lease is relatively straightforward. Lease payments are considered operating expenses and are expensed on the income statement. The firm does not own the asset and, therefore, it does not show up on the balance sheet and the firm does not assess any depreciation for the asset.
In contrast, a capital lease involves the transfer of ownership rights of the asset to the lessee. The lease is considered a loan (debt financing), and interest payments are expensed on the income statement. The present market value of the asset is included in the balance sheet under the assets side and depreciation is charged on the income statement. On the other side, the loan amount, which is the net present value of all future payments, is included under liabilities. In general, capital leases recognize expenses sooner than equivalent operating leases.
Advantages of a Capital Lease
There are many advantages to a capital lease, including the following:
Lessee is allowed to claim depreciation on the asset, which reduces taxable income
Interest expense also reduces taxable income
Advantages of an Operating Lease
There are many advantages to an operating lease as well:
Operating leases provide greater flexibility to companies as they can replace/update their equipment more often
No risk of obsolescence, as there is no transfer of ownership
Accounting for an operating lease is simpler
Lease payments are tax-deductible
You can convert equipment you already own that’s unencumbered into liquid assets or cash without losing the use of it. By selling your paid assets to a leasing company and then leasing them back from the leasing company, you can enjoy an infusion of cash with manageable monthly lease payments. NPC Executive Financial Consultants can arrange a Sale and Leaseback for most all types of equipment and usually for any amount.
“Turn your existing assets into new and avoid obsolescence”
Summary - Benefits of Leasing
A Lease Conserves Capital
One of the most important advantages of equipment leasing is the amount of working capital that you’re able to save for other productive uses. When Equipment is leased, it is paid for as it is used, not before. Since their's a minimal down payment required your valuable working capital is left intact.
A Lease Provides an Additional Line of Credit
Leasing eliminates the need to deplete current lines of bank credit and risk of limiting borrowing power. Rather, leasing increases your lines of credit without the necessity of pledging existing assets such as inventory or receivable for security.
A Lease Offers Tax Benefits
Lease payments are fully tax deductible as an operating expense, hence providing companies a larger and faster tax write off.
A Lease Provides Stability
A lease cannot be recalled or cancelled like bank loans. A lease also provides a fixed rate protected from inflation and fluctuating rates.
Lease to Own
Lease financing is designed for ownership. When all the benefits are considered, lease financing becomes a more practical and most cost-effective means in obtaining equipment.
A Lease Facilitates Budgeting
Corporate, divisional, or departmental budgets can easily be determined, as can operating projections, when equipment and operating costs are fixed. Its is much easier for the customer to approve a small monthly payment then a large capital expenditure. Through leasing, the customer can have their equipment immediately without waiting for budgeting delays or Head Office approvals.
A Lease Helps Manage Obsolescence
Advances in technology are being made so quickly, that what is new today may be obsolete in a few years. A lease program of planned replacement enables the customer to obtain maximum efficiency from their equipment. Through a lease, the consumer pays for the use of the equipment and not ownership. It is through the use of equipment that profits are generated.