Equipment Leasing: Preserve Your Cash
For expensive machinery (excavators, MRI machines, CNC routers), paying cash upfront is often unwise. It depletes your working capital. Leasing allows you to pay for the asset as it generates revenue.
Operating Lease vs Finance Lease
- Operating Lease (FMV): Use the equipment for a few years, then return it. Like a rental. The payments are Operating Expenses (OpEx) and tax-deductible. Good for tech that goes obsolete quickly (computers).
- Finance Lease (Capital Lease): You essentially own the asset. The lease is just a loan structure. You capitalize the asset on your balance sheet and depreciate it. Good for long-life assets (bulldozers).
The $1 Buyout Lease
A popular structure is the "$1 Buyout". You pay monthly for the term, and at the end, you buy the equipment for exactly $1. This is effectively a loan but legally a lease.
Section 179 Deduction
In the US, Section 179 allows businesses to deduct the FULL purchase price of qualifying equipment bought or financed during the tax year, up to over $1 million. This means you can buy a $50,000 machine, pay only $5,000 in lease payments this year, but deduct the full $50,000 from your taxable profit immediately. This is a massive tax benefit.
Fair Market Value (FMV) Lease
This is a true rental. At the end of the term, you have three choices:
- Return the equipment.
- Renew the lease.
- Buy the equipment for its "Fair Market Value" (which could be high).
This structure offers the lowest monthly payments because you aren't paying down the full principal.
The $1 Buyout (Capital Lease)
Contrast FMV with the $1 Buyout. Here, your monthly payments are higher because you ARE paying off the full principal plus interest. At the end, you own the machine for $1. This is best if you plan to keep the equipment for 10+ years (like a forklift).
FAQs
- Is credit check required?
- Yes. For equipment leases under $100k, it's often "App-Only" (application only, no tax returns needed), relying on personal credit score and time in business.
- Can I lease used equipment?
- Yes, but the terms may be shorter. Many lenders finance equipment up to 10 years old.
- Difference between Lease and Rent?
- Renting is usually short-term (days/weeks) and more expensive per day. Leasing is long-term (years) and cheaper monthly but requires a contract commitment.
- What about software leasing?
- Software is intangible, so it's hard to "repo". However, many lenders now finance software licenses (ERP, CRM) as a "Software Finance Agreement" where the license is revoked if you default.