Finance Leasing

There are quite a few equipment lease options available to the business owner who wishes to save some money. One of these lease structures is finance leasing. This is a specific equipment lease agreement that works much like a regular loan. However, unlike a regular loan for other types of products (cars, boats, homes, etc.), you do not actually own the equipment after the term of the lease expires. You can buy the equipment after the lease is over, however, at a rather low cost.

What is Finance Leasing?

With finance equipment leasing, you (the lessor) actually pay the full equipment cost and interest. Just like any other venture that includes the word "financing" interest is involved. When you structure a finance lease, the agreement represents the equipment's full value. So, over the term of the lease you will end up paying the entire value of the equipment. At the time the lease is structured, you and the leasing company will decide on the monthly payments, and each month you will receive a balance sheet.

In a finance lease, the equipment you lease is considered an asset. Your monthly balance sheet will include payment information, how much you still owe, and will also show the value of the equipment as an asset. You basically pay for the agreed upon value of the equipment, and you can keep track of whether the equipment gains or loses value over the primary lease term.

The reason a finance lease can be an advantage is the fact that its end of lease option allows you to buy the equipment at a small, almost minimal, cost. You have already paid the value of the equipment, so purchasing it means that you will pay less than the fair market value. If you plan to own the equipment when you finish the lease term, then this is not a bad lease structure. There are other structures that may have lower monthly payments, but if you want to purchase the equipment at the end, you have to either pay fair market value (on top of what you've paid in monthly fees) or something close to it.

Downsides to a Finance Lease

Downsides to finance equipment leasing include less immediate tax benefits and higher monthly payments. While there are some tax benefits associated with finance leasing, they do not appear as rapidly as with other structures, nor are they as big. Additionally, your monthly payment is higher, since you are going to be paying the value of the equipment, and since you are paying interest besides. Most leases end up costing more than regular bank financing, and finance leasing definitely will cost more. On the other hand, though, it is much easier to get a finance lease than to get an equipment loan from a bank.

If you do not plan to buy the equipment after the lease is up, a finance lease may not be your best alternative. If, however, you know that you will want to own the equipment eventually, you can save money on upfront costs (like loan fees) and purchase the equipment for a great deal later, when you might have more liquid capital at your disposal to spend on the equipment.