A Business Owner’s Guide to Equipment Leasing

As we move into 2025, fluctuating interest rates and soaring equipment prices have led many companies to consider equipment leasing as a practical alternative to purchasing. Leasing can help preserve cash flow and minimize the need for hefty down payments while still providing access to essential tools and machinery. Often, leases also include an option to purchase the equipment once the lease ends.

For many businesses, leasing equipment can reduce monthly costs, offer tax advantages, and allow for regular equipment upgrades. However, deciding whether to lease or buy depends heavily on the specific lease terms.

What Is Equipment Leasing?

Equipment leasing allows a business to rent equipment for a set period in exchange for regular payments. Unlike equipment loans—which finance the purchase of equipment—leases typically don’t require significant upfront costs. Many leases also cover installation and training expenses, making it easier for businesses to get up and running.

Commonly leased equipment includes:

• Agricultural machinery;

• Aircraft;

• Office and retail equipment;

• Construction and heavy machinery;

• IT and tech systems;

• Industrial and manufacturing equipment;

• Medical devices and technology;

• Mining machinery;

• Transportation vehicles (trucks, trailers); and

• Marine vessels and containers.

Advantages of Equipment Leasing

Leasing equipment offers several benefits, including:

Protection Against Obsolescence
Leasing allows businesses to stay current with the latest technology, ensuring they remain competitive without being burdened by outdated equipment.

Tax Benefits
Depending on the lease type, payments may be fully deductible, leading to potential tax savings. Alternatively, depreciation deductions may apply in some arrangements.

Cash Flow Flexibility
Leasing shifts costs from large capital expenditures to manageable monthly operating expenses, preserving cash for other business needs.

In addition the the above, leasing can also provide:

• Flexible lease terms tailored to business needs;

• Lower, predictable monthly payments;

• Protection from inflation impacts; and

• Easier access to upgraded equipment when necessary.

This flexibility can prove very useful for businesses that need to adapt quickly to changing market conditions.

Types of Equipment Leases

There are two primary types of equipment leases:

Capital Leases (Finance Leases)

A capital lease functions like a financed purchase. The lessee (business) often has the option to buy the equipment at the end of the lease for a set price. Key features of Capital Leases include:

• Treated as an asset and liability on the balance sheet;

• The lessee can typically deduct depreciation and interest; and

• Lessee is usually responsible for maintenance and insurance.

Capital leases are ideal for businesses intending to use the equipment long-term and eventually take ownership.

Operating Leases (True Leases)

An operating lease is more like renting. The business uses the equipment without owning it, although a purchase option may be available when the lease ends. Key features of operating leases include:

• Lease payments are often fully deductible;

• Equipment doesn’t appear as debt on financial statements; and

• Maintenance and insurance responsibilities vary by contract.

Operating leases work well for businesses that need equipment temporarily or expect rapid technological changes.

Key Lease Terms to Review

As with any other expensive and long-term commitment, it’s important to carefully review the terms of an equipment lease. Some particularly important terms to pay attention to include the following:

• Duration: Defines how long the lease lasts and outlines any renewal options.

• Rental Rate: Specifies monthly payments and due dates.

• Early Termination Requirements: Details conditions for ending the lease early, which is especially important if the equipment becomes obsolete.

• Insurance Requirements: Clarifies who must insure the equipment and who benefits from insurance payouts.

• Maintenance Obligations: States who is responsible for repairs and upkeep.

• Master Lease Agreements: Allows for additional equipment rentals under the same terms, potentially saving costs.

• Purchase Options: Outlines if and how the lessee can buy the equipment at the lease's end.

• Loss and Damage Clauses: Specifies financial responsibility for damaged, lost, or stolen equipment.

• Upgrade and Substitution Terms: Defines how and when equipment can be replaced during the lease.

• Termination Costs: Identifies who covers expenses like dismantling, shipping, or disposal after the lease ends.

• Transfer Rights: Addresses whether lease interests can be transferred or subleased.

Equipment leases often come with complex terms that impact finances, operations, and legal obligations. Whether you’re leasing machinery for the first time or renegotiating existing agreements, working with a knowledgeable business attorney ensures that your lease aligns with your company’s goals.