Every small business owner knows a key ingredient for success is the health of their finances. Having cash on hand for unexpected expenses is the difference between having a good night’s sleep or stressing out!
Heavy equipment is a big-ticket purchase and it usually makes more sense to consider a lease or finance solution versus dipping into your cash reserves.
But which one is better? We’ll show you the differences to help you better understand and pick the one that’s right for your business.
The biggest difference between equipment lease and equipment finance is ownership.
An equipment lease is essentially a rental agreement. A lender has agreed to purchase an asset from a vendor and rent the equipment to you on a monthly basis for a set term. At the end of the term you have the option to either purchase the equipment, renew your lease, or return the equipment. There are two main types of leases : operating leases and capital leases.
The monthly payment for operating leases is generally lower than if you were to get a capital lease. This type of lease gives you the option to purchase the equipment for fair market value at the end of the lease term or walk away from the equipment. Another name for this type of lease is called a fair market value lease. It’s a great option if you only need specialized equipment for a specific job.
Capital leases are structured like loans but have a different impact on your balance sheet because there is no depreciation of the asset. At the end of the lease term the owner has the option to buy the equipment for a nominal price or a percentage of the purchase price. The most popular capital lease in Canada is a $1 buyout lease which is not a true lease because of its structure but proves to be beneficial for many businesses.
With an equipment loan the asset appears on your balance sheet, and on your credit profile. There also is an interest rate associated with the loan versus a monthly rental payment. Because the equipment is self-secured you most likely won’t need to offer additional collateral because the lender can seize the asset and sell it to recover their costs if you were to default. At the end of the loan term the equipment is 100% yours.
Questions to ask yourself when deciding between the two are: How long do you need the equipment for? For short term use an operating lease may be better because of lower monthly costs. Which will provide you with better tax incentives? It important to speak with your accountant to get the best advice for your business. How much down payment do you have? Leases typically require less down payment with options to even split the tax amount over the course of the lease term.