Having the equipment you need is key for business success, whether you operate in the forestry, construction, transport or agricultural sectors.
Purchasing heavy equipment outright can be costly and impractical. Fortunately, equipment leasing opens up opportunities for businesses of all sizes to access up-to-date, high-quality machinery at affordable rates.
Signing an equipment lease is a big step. To make sure you are making a commitment that is realistic and profitable, get familiar with the different types of leases. Keep reading to learn the most important elements of each type of lease agreement so you can make the right choice for your business when it’s time to sign.
Two main types of equipment leases
Although equipment leasing comes in all shapes and sizes, they all fall into two main categories: operating leases and finance leases (ASC 842), also called capital leases.
Operating Lease
An operating lease is a contract where the lessee (business) pays to use the equipment for a specific period without the option to purchase it at the end of the term. The lessor (leasing company) retains ownership of the equipment throughout the lease. This type of lease is suitable for businesses that need equipment temporarily or want to avoid the liability of ownership.
Key features of an operating lease:
- Treated as a rental expense for tax purposes (100% deductible)
- Equipment is not recorded as an asset on the lessee’s balance sheet
- Lease term is typically shorter than the equipment’s useful life
- Lessee has the option to return the equipment or renew the lease at the end of term
- The lease term is short relative to the useful life of the asset (typically less than 75%)
- There is no transfer of ownership to the lessee at the end of the lease
- The lessee treats the lease payments as an operating expense on their income statement.
Common examples of operating leases for equipment and assets include:
- Leasing vehicles like cars, trucks, or vans for a company fleet for a few years
- Renting construction equipment like excavators, bulldozers, or cranes for a specific project
- Leasing office equipment like copiers, printers, or phone systems for a set term
- Renting heavy machinery like forklifts or manufacturing equipment for temporary use.
Finance (Capital) Lease
A finance lease is structured similarly to a loan. The lender purchases the heavy equipment outright and leases it to the business (lessee) for a fixed term. At the end of the term, the lessee has the option to purchase the equipment by paying the residual amount set at the beginning of the lease. This type of lease is ideal for long-lasting equipment like trucks, trailers, and heavy construction machinery.
Key features of a finance lease:
- Lessee records equipment as an asset and lease payments as liabilities on their balance sheet
- Lessee can claim depreciation and interest expenses for tax purposes
- Lease term covers a major portion of the equipment’s useful life
- Lessee bears risks and rewards of ownership during the lease period
- Lease term is for a major part (generally over 75%) of the equipment’s estimated useful life
- Lessee has the option to purchase the asset at the end for a bargain/nominal price.
Common examples of finance (capital) leases include:
- Leasing manufacturing equipment or heavy machinery for the majority of its useful life, with an option to purchase at the end for a nominal fee. For example, leasing industrial printing presses or CNC machines.
- Leasing vehicles like trucks or construction equipment for most of their economic life, with ownership transfer at lease termination. This is common for transportation and logistics companies.
- Leasing aircraft or ships for airlines and shipping companies, where the lease term covers a substantial portion of the asset’s useful life.
- Leasing specialized medical equipment like MRI or CT scanners for hospitals and clinics, with an option to buy at the end.
- Leasing computer hardware and data center equipment for tech companies, with lease periods close to the assets’ depreciation schedules.
Other types of equipment leases
There are three other types of equipment leases that businesses in Canada may encounter in their search to acquire the machinery they need to operate in a competitive market.
TRAC (Terminal Rental Adjustment Clause) lease
A TRAC lease is a specialized type of vehicle and trailer operating lease that provides flexibility in adjusting payment terms, lease lengths, and residual values during the lease period, while also allowing them to share in the sale proceeds at lease-end.
Sale-leaseback
A sale-leaseback is a financial transaction where a company sells an asset (typically real estate or equipment) to a buyer, and then leases it back from the new owner for an extended period. At the end of the lease term, the lessee may have the option to purchase the asset back, extend the lease, or return it to the lessor.
Equipment financing agreement (EFA)
An equipment financing agreement (EFA) is a type of financing contract that combines elements of a loan and a lease. It allows a business to acquire equipment while retaining ownership, similar to a loan, but with fixed periodic payments structured like a lease.
How to choose the right equipment lease agreement
Choosing the right lease for your business depends on many factors. Always take the time to consult with several financing institutions and ask as many questions as possible before deciding.
Here are a few general guidelines for choosing the right type of lease:
Operating leases allow businesses to use assets for a portion of their useful lives without the burden of ownership. They are a good choice if you need temporary use of the asset.
Finance leases are a good choice when the lessee intends to use the asset for most of its economic life and eventually acquire ownership, while benefiting from 100% financing and tax advantages.
TRAC leases are primarily used for leasing motor vehicles, trucks, and trailers intended for commercial use. Large corporate fleets rely on this type of lease due to the flexibility and potential cost savings they offer.
Sale-leasebacks are commonly used by companies looking to raise funds for expansion, debt repayment, or other investments while retaining use of critical assets.
Equipment financing agreements are a popular financing option for businesses acquiring equipment that retains significant value over its useful life.
Soluco offers equipment leasing to Canadian businesses
Leasing is an excellent option for acquiring commercial and industrial equipment, whether for the short or long term. It allows businesses to access the machinery they need even without upfront capital.
Soluco offers lease approvals within 48 hours. Our vendor financing program allows us to provide flexible solutions tailored to the needs of businesses of all sizes. Contact us today to access a variety of specialized equipment and heavy machinery.