Equipment Leasing | Meaning | Types
What is equipment leasing?
Equipment Leasing provides a flexible, creative alternative to buying as a way of obtaining the necessary equipment to run a cash-short business. Leasing is used for a wide variety of equipment ranging from airplanes to vehicles to kitchen equipment for a restaurant to computers.
In the typical equipment-leasing arrangement, an equipment-leasing company (the lessor) buys equipment or other fixed assets. It then executes a contract with the entity (the lessee) that will use the asset. In return for the use of the asset, the lessee makes fixed payments to the lessor for a specified period.
Types of equipment leasing:
The two basic types of equipment leases are
- operating lease and
- finance lease.
1. Operating Lease: Most small value equipment, such as office machines, are leased with an operating lease. In an operating lease, the lessee can typically return the equipment to the lessor any time after proper notice. The lease payments are treated as operating expenses, deducted immediately from operating revenues for accounting and tax purposes.
2. Financial Lease: In contrast, a lessee cannot cancel a finance lease (often called full-payout or closed-end lease). The lease payments recover most of the equipment cost for the lessor together with interest on the investment. Financial leases must be capitalized as a liability on the lessee’s balance sheet.
The value of the related equipment is capitalized as an asset and depreciated over the term of the lease. Financial and tax accounting for a financial lease is complicated and not necessarily the same. Qualified advice, such as a CPA with experience in accounting for leases, should be consulted before a financial lease is signed.
KEY POINT: Equipment easing is almost always more expensive than borrowing and buying. However, it provides other advantages that may justify its use. You don’t have to raise the cash through a loan or an equity offering to purchase needed equipment. And your company’s taxes are typically reduced more in the short run than if the equipment was purchased and depreciated over time.
To learn more about equipment leasing or to obtain a list of vendors who lease equipment to their business, you should contact the Equipment Leasing Association of America at www.elaonline.com.
