Below are some of the most frequently asked questions regarding equipment leasing. If you have a question that it is not listed below, please send your question to us through our contact form and we will try to answer it promptly.
Normally equipment leasing companies do not quote interest rates since in most cases, unlike a bank loan, the entire payment on a lease can be tax deductible. The leasing company owns the equipment during the term of the lease.
Calculating the rate on a lease can be fairly complex for most people. Unless you can solve this equation:
There is, however, a quick calculation that can be done to show how much the cost would be per year, over and above the equipment cost.
Let’s say the equipment was $7,500.00 and the monthly lease payment for 60 months is $193.50.
$193.50 X 60 (months) = $11,610
$11,610 – $7,500 (equipment cost) = $4,100
$4,100 / 5 (number of years) = $820.00
$820 / $7,500 = 11% per year is the lease cost
If you exercise the 10% purchase option at the end of the lease, this is also divided by 5 and gives 2%, so the 11% becomes 13%.
Although equipment leasing companies allow early payoffs, an early pay off might be more expensive for your business.
When you sign a lease agreement, you are committing to pay a certain amount of payments (12, 24, 36, 48 or 60 payments). This is the difference between a loan and a lease. With a loan, the borrower can pay off the principle balance at any time with no interest. With a lease, you are required to pay all payments (all principle and interest) as agreed through the term of the lease. There is no penalty for early pay off, however you would be exercising you purchase option in addition to paying off the net lease balance. If this occurs early on in the lease agreement, the payoff could be higher than the original equipment cost.
To get the payoff amount, you must calculate the sum of the remaining payments on the lease. On some occasions, equipment leasing companies will offer a small discount off the sum of the remaining payments due on the lease. This is more common once half of the lease has been paid off and dependent upon a good pay history.
If it is important to your business to pay off a lease early, you should plan ahead a get a shorter term.
Equipment leasing companies have their own customized plans for different industries, so it is difficult to list all types of equipment that will qualify for a lease. The most common are:
- Construction equipment
- Medical equipment
- Dental equipment
- Fitness equipment
- Heavy equipment
- Dry cleaning equipment
- Telecommunication equipment
- Office Equipment
- Computers & Networking equipment
- Restaurant equipment
- Industrial equipment
- And many more
The IRS guidelines on lasing call for a purchase option of 10% or greater in order to be considered a true lease. With anything less than 10% the IRS considers the transaction a conditional sale contract, and you could lose the tax write-off if audited.
Some people might choose the dollar buyout at the end of the lease because they do not want to pay a large sum at the end. In some cases lessees will deduct the payments as a rental expense even though the lease is considered a conditional sale contract. That is a great mistake as they would be putting themselves at risk of getting in trouble with the IRS.
All warranties and vendor guarantees are passed along to you (the lessee). Beyond the warranty time frame, you would contact the dealer or manufacturer. Equipment leasing companies buy the equipment for the lessees, but they do not take liability of the equipment.
No, an equipment lease is a contract for a specified number of payments. The only way to terminate the agreement prematurely is to pay-off the lease.
The lessee’s payments may include use tax. Use tax is calculated by multiplying the payments times the lessee’s local tax rate. Sometimes tax is included in the payment and other times it is billed separately on the monthly bill.
Sometimes it is. It depends on the leasing company. Leasing companies reserve the right to approve the new lessee from a credit standpoint. Once the new lessee is approved, leasing companies will provide an assumption form for all parties to sign.
You may be able to, but this will depend on the terms stipulated by the leasing company you are working with. Sometimes leasing companies will allow you to add equipment at a later date by signing a separate lease agreement or amendment for the additional items. You will still receive one monthly bill, and you can also arrange so that all leases terminate together.
This varies from leasing company to company. The lease would have to be paid-off and re-written. The amount that it would cost to pay-off the lease and write another on depends on whether you are going to do another lease and upgrade, or pay it off and walk away. This can get pretty expensive.
Yes, almost all leasing companies will allow you to purchase from multiple vendors on one lease.
In the majority of cases a lease is non-cancelable unless negotiated prior to documentation with a specialized leasing company. You are required to make all the payments as agreed per the lease agreement.
You can lease virtually any business or professional equipment. Equipment is ordered from any reputable vendor you choose. Equipment leasing is available for all type of equipment from major manufacture equipment to smaller equipment, such as computers. You can get your equipment leased through equipment leasing companies, banks, finance companies, and from equipment manufactures or retailers.
Companies that have to make major investments in equipment and do not want to tie up large sums of money, companies that need to change their equipment frequently, and companies with good cash flow that can easily afford the monthly payments but do not have the money to lay out for the purchase of equipment.
The monthly payment is based on the risk factor associated with the industry, time in business, cost of equipment, and the terms requested by the lessee. The initial terms of a lease are normally 12 to 60 months and will also impact the payment terms. Leasing rates can be determined by factors such as:
- The cost of the leased asset.
- The lease term.
- The lease rental structure.
- The credit strength of the lessee including their history of other debt.
- The financial strength of the lessee including term debt requirements and available cash flow.
A security deposit, normally equal to one or two monthly lease payments, is generally needed. This differs from a down payment since the amount is generally much less. It is a true deposit, which can be applied to the purchase price of the equipment at lease-end, or returned if there are no other payments due.
What happens at the end of a lease is up to you (the lessee). You decide at the beginning of the lease which type of lease you want. You may choose a lease that gives you the flexibility of waiting until the end of the lease to decide. Generally you will have the following choices:
- Return the equipment at the end of the lease with no further obligation. Assuming the equipment is in normal working condition; any security deposits paid will be refunded back to you.
- You may re-lease the equipment. Many leases offer annual or monthly renewals at re-negotiated lease payments. Because the leasing company has already gotten a good deal of their investment back, you can generally look for drastically reduced lease payments.
- You may trade in or upgrade the equipment for a lease on newer equipment. You may effectively get the value of a trade-in on equipment you didn’t even own.
- You may purchase the leased equipment. In the case of the so-called “$1 Buyout” lease, you will take ownership for $1.00.