This post was reviewed and updated on 7/9/2020
No matter how smart you are or how great your product may be, your business needs one very important ingredient if it’s going to thrive—the right equipment. Commercial equipment—whether that’s an industrial mixer for your bakery, computers for your accounting firm, or a fleet of trucks for your delivery service—can help optimize performance and take your business to the next level.
The problem is…equipment is expensive, particularly if you need the latest and greatest technology.
Thankfully, an equipment lease may be able to help you get the specialized machinery or technology your company needs now, even if you don’t have all the money you need to buy the equipment outright. Leasing equipment is also a great alternative to equipment financing loans if you don’t qualify or aren’t interested in small business loans.
What is an Equipment Lease?
Essentially, leasing can be viewed as an alternative small business financing option. It’s a way to help you get what your business needs now with less money out of your pocket on the front end.
Leasing transactions involve a contract between a lessor (usually equipment dealers or financial firms who specialize in leases) and a lessee (that’s you). The lessor buys the equipment outright from the manufacturer. As the lessee, you’re allowed to use the equipment for a period of time, provided you hold up your end of the bargain and make your agreed-upon monthly payments on time to the lessor.
Depending on the type of lease, once the lease is up, you can surrender it back to the lessor, or you may have the option to buy the equipment.
Of course, every lease is different, but it’s not unusual to find companies willing to offer two- to five-year leases with interest rates in the 8.5%-20% range. Your exact rate and terms will vary depending upon your credit, the type of equipment you’re seeking to lease, and even your business’ industry. You’ll generally need a decent personal credit score to qualify for the most attractive rates and terms.
Some types of equipment you might be able to secure with an equipment lease include:
- Heavy equipment
- Medical equipment
- Specialized equipment
- Restaurant equipment
Benefits of Leasing
The biggest reason small business owners consider leasing equipment is the lower initial expense. Rather than making a down payment for costly equipment you’re buying, you simply start making your monthly payments after the lease starts. This is a boon for businesses, particularly those in the startup phase.
You can also benefit from tax deductions on your lease payments, which helps you save more money.
And finally, because a lot of equipment quickly becomes outdated, thanks to rapidly-improving technology, leasing can ensure you have the latest upgrade without being saddled with trying to sell equipment that is past its prime.
How Equipment Leasing Can Improve Cash Flow for Your Business
When you need a new, expensive piece of equipment, buying it outright can put a serious strain on your business’ cash flow. Using a large portion of your available working capital means that you will no longer have access to that money when other expenses arise, as they inevitably do in any business.
However, you can preserve your company cash flow by using an operating lease to secure the equipment instead. Leasing solutions can help you both preserve cash flow and grow your business with the equipment you need.
Remember, good cash flow can often be the difference between business success and business failure. It sounds dramatic, but it’s true. Many businesses have experienced disaster due to cash flow challenges they failed to overcome.
Anything you can do to affordably increase your company’s cash flow may be a good idea. At the very least, if it improves cash flow and helps your balance sheet, it’s worth some serious consideration.
Equipment Leasing Business Model
Because specialized business equipment is such an integral part of running many businesses, it’s no surprise that there are many companies lining up to provide leasing options. In fact, the world of equipment leasing is quite competitive. (See below for specific examples.)
At this point, you may be wondering how leasing companies make money. There’s actually not just one simple answer to that question. Instead, there are a number of ways for money to be made through an equipment leasing business model, including:
- Finance Charges — A leasing company might, for example, purchase a piece of equipment at 9% APR but lease it to you at 12%.
- Equipment Owner Tax Benefits — Since the leasing company actually maintains ownership of the equipment, it often gets to take advantage of any owner-specific tax benefits such as depreciation.
- Prepayment Penalties — A leasing company might offer you the right to get out of your contract early, but at a cost.
- Excess Use Charges — The equipment you lease will likely have usage restrictions. If you as the lessee return the equipment in poor condition or with excess mileage, you might have to pay a penalty.
Equipment Leasing Definitions
If you’re considering leasing equipment for your company, it’s a good idea to understand several important lease structure definitions, along with the specific payment terms and fees that may be part of your lease agreement.
Technology or machinery that you need to operate your business that costs near or above $5,000 is often referred to as “capital equipment” in the equipment leasing world.
This is the type of equipment most commonly leased in the U.S., both to preserve cash flow and to avoid paying outright for equipment that’s likely to be obsolete within a few years.
When you sign up for a capital lease, you typically have the option to buy the equipment at the end of the lease term—sometimes for as low as $1. Capital leases generally feature longer payback terms (you pay over a longer period of time) and can’t be canceled early.
You may also be responsible for making repairs and paying insurance and tax on the equipment. Your monthly operating lease payments may be higher with this option.
With a true lease, you typically have the option to return the equipment at the end of your lease period. However, you can also opt to purchase it or roll it over into the lease of newer equipment.
A skip lease can be a good fit for businesses that are more profitable during certain seasons. During certain months, larger payments will be due. However, you can set up your payment structure so that during other, traditionally slower months, you may be able to skip payments altogether.
A TRAC lease (terminal rental adjustment clause) is specific to vehicles you use in your business, and it allows you to make adjustments to payment terms and lengths. There are no wear-and-tear mileage restrictions, so this is great if you plan on driving commercial vehicles heavily.
This is a type of operating lease where the lessor is considered a special-purpose entity for accounting purposes. As the lessee, the asset you are leasing never appears on your balance sheet, and you can write off the expense.
Do you own a piece of commercial equipment outright? If so, you might be able to sell it to an equipment leasing company for a lump sum to get access to working capital. However, you could then turn around and lease the equipment back from the lessor so that your business can continue to use the machinery. This is called a sale leaseback.
Monthly Payment Terms
Your lease agreement (aka contract) will lay out the terms that you have to follow to maintain the right to use the equipment. These will include financial terms like how much you have to pay each month and when those payments are due.
If you miss a due date, you may be charged a late fee and, if you fall far enough behind on your payments, the equipment might be repossessed.
Equipment Leasing and Finance Association
If you’re searching for affordable lease options for your company, you’ll probably come across one organization—the Equipment Leasing and Finance Foundation. ELFF is a non-profit organization that encourages thoughtful innovation and the general betterment of the equipment financing and leasing industry.
Credit Score Requirements for Equipment Leases
Just like with equipment loans, to qualify for an equipment lease you’ll need to satisfy the credit score requirements set forth by the equipment leasing company. In general, a higher personal credit score leads to lower rates and smaller monthly payments on your equipment lease.
In general, there are four different credit tiers that could impact your chances of approval and the cost of your operating lease, if your credit is strong enough to qualify.
|Financing Tier||Credit Score Required|
|A Tier||Over 700 FICO Score|
|B Tier||680 to 700 FICO Score|
|C Tier||620 to 680 FICO Score|
|D Tier||520 to 630 FICO Score|
Just remember, financial institutions (like banks or credit unions), online lenders, and leasing companies have their own set of approval and pricing criteria. The tiers above can be used as a basic guideline, but they may not match exactly to the requirements you encounter with a specific bank or equipment leasing company.
Be sure to check the requirements for the institution before filling out a lease application form.
Top 50 Equipment Leasing Companies
The Monitor Daily dubs itself “the independent voice of equipment finance.” Every year, the Monitor publishes several reports pertaining to the equipment financing and leasing industry in the United States. Among these reports is one entitled the Monitor Bank 50 (available for purchase).
The Monitor Bank 50 report ranks the top “bank-affiliated equipment leasing and finance companies in the U.S.” This can be helpful in your search for the best leasing company to work with.
The report measures the performance of these banks over the past 12 months, including their net asset size, new business activity, and market share. It also forecasts how the banks may continue to perform in the years to come. What the report cannot tell you is whether any of these banks may offer the right leasing option for you.
Equipment Leasing Companies
If you’re considering a lease over equipment financing or a business loan, you’ll need to do your homework and research who offers the best deal based on your situation.
Here’s a list of a few equipment leasing companies you might want to review.
Guidant Financial can provide equipment leases valued at a minimum of $10,000. You’ll need a credit utilization of 70% or less and a 650+ credit score for an established business.
TimePayment offers both lease-to-own and fair market value lease solutions. Those running startups or with less-than-perfect credit may be eligible for leases.
Crest Capital offers both no-hassle equipment leases and financing. You can even finance used equipment, and the application process is easy and fast.
Heavy Equipment Leasing Companies
If you need to lease heavy equipment for your company, such as construction equipment, here are a few companies that specialize in this type of lease.
CIT will work with your budget and equipment needs to customize a lease or financing option for you. The company specializes in construction equipment leases for equipment like skid steers, farm equipment, and drills.
American Capital Group
American Capital Group is an option to consider if you need several pieces of heavy equipment since you can bundle multiple items together for one monthly payment.
All you need to get started with a lease from National Funding is an equipment quote from a vendor, a FICO score of 620+, and at least 6 months in business under your belt.
Be sure to do your research and compare any offers from these companies with other equipment lease offers that may be available.
Equipment Leasing Companies for Bad Credit
As mentioned, the better the condition of your credit, the easier and more affordable it will typically be to lease equipment for your company. If you try to qualify for an equipment lease when you have a poor credit rating, your options are likely to be very limited. The same goes if you want to take out an equipment loan.
These companies may offer more flexibility in terms of credit requirements for a lease.
Smarter Finance USA
Smarter Finance USA may be able to help you qualify for leasing offers even if you have a credit score in the low 500s, a bankruptcy, or a tax lien.
First Capital is another option for a lease if you have bad or no credit or a low credit score, have had debts sent to collections, or have a bankruptcy or tax lien on your credit history.
Keep in mind that even if you can technically qualify for a lease, a leasing company may want you to satisfy certain other requirements as a tradeoff for having less-than-stellar credit.
With bad credit you might face any of the following consequences:
- Higher down payment
- Cosigner requirement
- Additional collateral requirement
- Higher interest rate
If you only need a small investment in equipment, you might also consider business credit cards, especially those with low or no interest introductory offers.
If you currently have credit problems, your best bet is to work on improving your credit rating as quickly as possible so that you won’t face approval problems or less attractive terms in the future. Remember, for all small business owners, strong personal credit scores can be a very valuable asset.
Equipment Leasing Calculator
It’s smart to calculate the full cost that a leasing company might charge you to spread out your payments when you’re comparing equipment leasing options—or any other types of equipment financing possibilities, for that matter.
Be sure to calculate not just the interest rate you’re being charged, but also any additional fees (e.g. origination fees, etc.).
These small business loan calculators from Nav may help to give you a better picture of what you’ll be expected to pay overall for an equipment lease.
Nav’s Final Word: Equipment Leasing for Small Businesses
Depending on your equipment needs, leasing may be your best option for retaining capital if you don’t want to take out a loan. Remember, though, that as the lessee, you have certain responsibilities with that lease. You must keep the equipment in good condition. You may be required to have it regularly serviced to ensure its efficiency. If you don’t meet the criteria set forth in your lease agreement, you may be charged fees at the end of the term.