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📅 Last Updated: April 3, 2023
✏️ Written By Lisa Rennie
🕵️ Fact-Checked by Caitlin Wood

Most businesses require some sort of equipment to run their business. Unfortunately, business equipment can be incredibly expensive, especially when you’re talking about oversized or intricate machinery. 

Not only is the equipment expensive, but newer, more innovative models are always being released, which means what may be good for you today, may not be as efficient or profitable to you in the future. 

Considering the high cost of equipment and the fact that it needs to be replaced from time to time, it might make more sense to lease it instead of buying it outright. Let’s take a deeper look into commercial equipment leasing and how it may help to relieve some pressure on your business’s bottom line. 

What Is Commercial Equipment Leasing?

Rather than buying expensive equipment and paying in full, commercial equipment leasing offers businesses a way to get their hands on the latest models without using up their working capital all at once. It’s a powerful financial tool that can help businesses successfully operate and expand their operations. 

Rather than purchasing the equipment required, the equipment is leased from a leasing agent at a specific monthly interest rate for a certain number of months, similar to the way a car lease might work.

How Does Commercial Equipment Leasing Work? 

As mentioned, commercial leasing works a lot like a car lease. An equipment leasing agent will own or buy the equipment you need and then lease (rent) it to you. The lease will usually come with a fixed interest rate over a period of time. This ensures that the payments you make are the same until the end of the period.

Once you make your payments and reach the end of the term, you’ll have the option to either return or purchase the equipment (depending on the contract terms). 

Types Of Commercial Equipment Leases

If you’ve decided that leasing your equipment is the way to go, consider exactly which type of lease to opt for:

Operating Lease

An operating lease lets you use an asset for a certain amount of time without actually owning it. The lease period is typically not as long as the economic life of the equipment, and once the lease expires, the leasing agent can recoup any extra costs by selling the equipment.

Equipment that is leased with an operating lease is considered a rental expense, which can be advantageous because it won’t be listed as an asset or liability and can still qualify for tax incentives. Annual rates for operating leases can range anywhere from 3% to 30% depending on the leasing agent and your financial health, and the typical contract is anywhere from 12 to 36 months long.

Capital Lease     

Also referred to as a finance lease, a capital lease still involves the leasing agent owning the equipment, but the lease is considered an asset. As such, it can increase your business’ holdings and liabilities. 

This can be advantageous for larger companies because they can claim interest expenses and depreciation tax credits. Businesses can also buy the equipment at the end of the lease if they choose to do so. That said, the rates for a capital lease are usually higher than those with an operating lease, and contracts tend to range from 24 to 72 months.

Benefits Of Commercial Equipment Leasing

There are plenty of advantages that come with leasing your equipment instead of buying:

  • Improves Cash Flow – One of the main advantages of leasing is you don’t need to pay for equipment in full upfront, which helps keep your business funds liquid.
  • Won’t Get Stuck With Old Equipment – If you’re in an industry that is constantly evolving (ex: computer and electronics), certain equipment can become obsolete.  With equipment leasing, you won’t have to replace or buy new equipment to keep up with innovations. 
  • More Affordable – Rather than paying for equipment upfront, leasing makes it possible for businesses to afford equipment that would otherwise be too expensive to buy.
  • Tax Deductible – In Canada, equipment leases for your business can be used as a tax-deductible. You could deduct a certain percentage of your leasing costs depending on business income. Check out the Government of Canada website for more info. 
  • Purchase Or Return – You may return the equipment at the end of the lease term or purchase it for a price that takes into account both the appreciation and the amount you’ve already paid 

Drawbacks To Commercial Equipment Leasing

Along with the benefits of leasing your equipment, there are also be some disadvantages that you may want to consider:

  • No Modifications – You can’t modify the equipment to suit your specific needs. 
  • Repairs Require Approval – If your equipment requires a repair or a new replacement part, you have to get approval from the leasing company before getting it repaired.
  • Interest – Leasing still requires you to pay interest on the equipment. 
  • Lender Requirements – Some lenders may require you to be bound to a specific term length and mandatory service packages

Need a truck for your business? Learn how to finance a truck for your business.

Where Can You Get a Commercial Equipment Lease?

There are various sources for these types of leases, including the following:

Leasing company

A leasing company works specifically with the manufacturer of the equipment and facilitates the lease.  

Lease Broker

These types of brokers work on your behalf to find a leasing company that will provide you with the best rates and fees. The lease broker essentially serves as an intermediary between you and the lessors they deal with and will find offers, submit your requests for financing, and deal with the paperwork. Lease brokers are certainly helpful, but they charge for their services anywhere between 2% to 4% of the cost of the equipment. However, they are often able to get better prices than you might get if you didn’t work with a broker. 

Independent Lessor

These lessors can include banks, lease specialists, and specialized financial companies that offer equipment leases to businesses. They usually specialize in remarketing equipment that allows them to group equipment from various manufacturers and offer better rates. 

Commercial Equipment Leasing Costs To Consider

If you take out a commercial equipment lease instead of buying the equipment, you’ll have certain obligations that you will need to adhere to. Aside from making your monthly payments on time, other responsibilities include:

  • Paying insurance – You’ll need to cover the cost of insurance for the equipment, with policies ranging in cost from $200 to $2,200 a year. 
  • Covering extraneous costs – you might be responsible for covering the cost of certain types of maintenance and repairs, legal fees, certification expenses, and fines.
  • Paying contract fees – Read the fine print on your lease contract, as there would be extra fees included that you will be responsible for, including documentation fees, late-payment fees, and others.

How To Apply For A Commercial Equipment Lease?

To lease your business’ equipment, there are certain steps you need to take:

  • Fill out an equipment lease application
  • Give the leasing company between 24 to 48 hours to process the application and notify you of the result
  • Be prepared to submit financial information or a business plan for higher amounts over $10,000 
  • Review the lease structure after you have been approved, including details such as the fixed rate and monthly payment amount
  • Sign the documents and resubmit them to the leasing agent along with your first payment
  • You’ll then be notified that the lease has taken effect
  • Funds will be released within 24 to 48 hours to you or the equipment manufacturer 

Should You Lease Your Commercial Equipment? 

Leasing is generally preferred if the equipment you need is one that can quickly become obsolete or outdated. Similarly, if you expect a lot of wear and tear, and expect to update your equipment regularly, leasing can be the better option. 

When Should You Purchase Your Equipment? 

Financing your equipment can sometimes be a better option if the equipment has a long useful life or if you plan on keeping the equipment as an asset. Moreover, financing is generally cheaper than leasing and then buying the equipment. 

Commercial Equipment Leasing FAQs

How much do I have to pay upfront?

Some lenders will require a down payment if the equipment you’re trying to lease depreciates quickly. The amount depends on the equipment value and the depreciation rate.   

Can I claim depreciation? 

Your company should be able to claim depreciation under a loan structure, but you must provide a down payment, and the rate may be higher. But under a lease, the leasing agent can claim depreciation in exchange for a lower APR.

How flexible are the terms?

 Equipment leasing is generally considered to be the most flexible financing option. That said, you should still find out what the exact terms are to see just how flexible they are for you.  

Do I need to return the equipment when the lease is up?

Once your lease term is over, you will need to return the equipment. However, some agreements will allow you to purchase the equipment at the end of the lease period for the fair market value of the equipment.  

Bottom Line

If your business is in need of equipment but your capital isn’t sizable enough to cover those huge costs, a commercial equipment lease might prove to be helpful. Apply with Loans Canada and we’ll help put you in touch with a reputable leasing agent from our vast network of lenders today.

Caitlin Wood Priyanka Correia Lisa Rennie Bryan Daly Cris Ravazzano Margaret Johnson Kale Havervold Liz Enriquez Sean Cooper Veronica Ott Corrina Murdoch Chrissy Kapralos

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