Business and Commercial Equipment Leasing
Loans Canada: The Country's Best Loan Comparison Platform
Business and Commercial Equipment Leasing
If you run a commercial business, then you are well aware of just how expensive all that equipment you need to run your business can be. Equipment is incredibly pricey, 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 popular today may be obsolete 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 in your business’ 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 rate for a certain number of months, similar to the way a car lease might work.
Why Choose Commercial Equipment Leasing?
There are plenty of advantages that come with leasing your equipment instead of buying:
- No need to pay for equipment in full upfront
- No need to constantly buy new equipment every so often to keep up with innovations (especially in the computer and electronics industry)
- No need to get stuck with obsolete equipment
- Makes it possible for businesses to afford equipment that would otherwise be too expensive to buy
- Offers a broader range of equipment options for businesses
- No large down payment required
- May be eligible for tax credits
- May include service agreements or add-ons
- 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
Looking to incorporate your business in Canada? This article is for you.
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:
- You can’t modify the equipment to suit your specific needs
- You’re bound by the limitations set by the leasing agent
- You have to get approval from the leasing company to get a repair or replacement part taken care of
- Requires interest to be paid
- Some lenders may require you to be bound to a specific term length and mandatory service packages
Buying Vs Leasing Your Equipment
Before you decide whether to buy your equipment outright or lease it, there are some considerations that you should make first:
- Purchase price
- Amount that will be financed
- Interest rate for lease option
- Annual depreciation
- Tax rates
- Your monthly budget
- Monthly lease fees
- How often you need to replace equipment
- How much the equipment will be used
- How quickly the equipment will become obsolete
- Maintenance costs
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:
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 are usually 5% or lower, and the typical contract is anywhere from 12 to 36 months long.
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, typically between 6% and 9%, and contracts tend to range from 24 to 72 months.
Did you know what if you own your equipment outright, you can use it to secure a business loan? Learn more here.
What Are Your Responsibilities With a Commercial Equipment Lease?
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.
Returning the equipment when the lease is up – once your lease term is over, you will need to return the equipment. This means that if the equipment is important to the success of your business, you’ll need to figure out a plan to replace it.
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 the Commercial Equipment Lease Application Process Works
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
Do you also lease an office? Click here to learn about leasehold improvements.
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.
Before you settle on a specific lessor, be sure to ask important questions first, such as:
How much do I have to pay upfront? If a down payment is necessary, you’ll need to be able to come up with this cost.
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.
Looking to Take Out a Commercial Equipment Lease?
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. Call Loans Canada to help put you in touch with a reputable leasing agent from our vast network of lenders today.
Largest Lender Network In Canada
Save time and money with Loans Canada. Research and compare lenders before you apply. Share your experiences with Canada's top lenders.