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Comparing a Capital and Operating Lease

Deciding to lease equipment for your business is a common option, but there are many lease structures to choose from, including the capital lease and operating lease.

Below is a quick overview of what they are and some key differences between them:

Capital Lease

A capital lease allows you to lease equipment in a way that reflects ownership of the equipment on your balance sheet, so that the equipment is treated as an asset.

It is treated as a purchase both for the lessee and lessor for accounting purposes. The lessee gets both the benefits and downsides of ownership of the equipment.

Capital leases are usually long term leases and are good options for certain types of equipment that do not become technologically obsolete very easily, like machinery.

The title is transferred to the lessee once the purchase has been completed, either prior to the end of the lease term or at the end of the term.

One of the following conditions that must be met in order for the lease to be considered a true capital lease by the FASB (Financial Accounting Standards Board):

• The title passes automatically by the end of the lease term.
• The lease contains a bargain option to purchase the equipment.
• The lease term is greater than 75% of the useful equipment life.
• The current value of the lease payments is greater than 90% of the FMV (fair market value) of the equipment.

Operating Lease

Operating leases are a lease structure that does not come with a title transfer at the end of the lease.

They are often a short-term lease and are good for certain types of equipment that become technologically obsolete very quickly, like servers, printers or office equipment.

One of the following conditions must be met for the lease to be considered a true operating lease by the FASB:

• The lessor holds onto the title before, during and after the lease term.
• The lease cannot have a bargain option to purchase the equipment.
• The lease term should be less than 75% of the useful equipment life.
• The current value of the lease payments should be less than 90% of the FMV (fair market value of the equipment)

Whether a capital lease and operating lease; It can be challenging to determine which type of lease structure will work best for your business.  Alliance Funding Group is available to meet with you to help you make that determination, along with answering your questions about other leasing options.

Call Alliance Funding Group today at 1-800-978-8817 to learn more.

4 Things to Consider When Leasing Equipment

The choice of leasing equipment or buying equipment for your business is one that shouldn’t be taken lightly. Both options come with distinct pros and cons.

Below are some important things to consider when deciding on leasing compared to buying equipment for your business:

Do you need equipment that becomes technologically obsolete quickly?

Leasing is a great option for businesses that rely on equipment that goes obsolete quickly, such as printers, computers, vehicles, tablets, smartphones, etc.

An operating lease allows you to acquire the latest equipment at a small upfront cost, use it to grow your business, and then have no obligation to purchase or maintain it at any point during the contract.

Is the equipment the type that does not become obsolete very quickly?

In this case, you should consider a lease option that will allow you to purchase the equipment at some point, particularly a capital lease. In that way, you can keep your upfront costs low while still exercising an option to buy so you can obtain the title to the equipment at a fair price.

Do you want minimal responsibility for maintenance as well as flexibility?

Leasing business equipment allows for the utmost in flexibility. Although you cannot typically terminate a lease agreement without a fee, you are usually not obligated to maintain the equipment, as it is usually new and warrantied.

You can keep your equipment new and fresh every few years and avoid the hassle of having to sell it, often at a major discount unless you want to spend the time to haggle and market the equipment.

Do you want to keep your costs low?

It’s hard to keep your costs low when purchasing equipment, there’s the down payment cost, monthly payment, maintenance and more.

Most of those costs are avoided with a lease. With a minimal to no down payment, a low monthly payment, and no need to have a maintenance staff or budget, leasing is often preferred.

Of course, leasing has aspects which can be seen as disadvantages, such as the requirement to fulfill the full lease term, a lack of an ownership option for some types of leases, and what can sometimes amount to higher long-term costs.

The decision to lease or buy equipment really depends on your situation. Leasing is an attractive option for many businesses, but it’s best to meet with an expert to determine what will work best for you.

Contact Alliance Funding Group today at 1 800-978-8817 to discuss leasing versus financing equipment for your business.