Equipment Lease Calculator

Understanding the Basics of Equipment Leasing

From computers to machinery, how you acquire your equipment can significantly impact your business's cash flow and long-term financial health.  

Both leasing and buying or financing equipment offer distinct advantages and disadvantages. The decision ultimately depends on your business's specific needs, financial situation, and long-term goals.  

By carefully evaluating your options and using a tool like an equipment finance calculator, you can get information to help you make a decision that supports your business's growth and stability.

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Equipment Leasing vs. Equipment Financing: Which Is Right for You?

Leasing equipment essentially means making regular payments to rent it for a set period. At the end of some lease terms, your options could include buying it, returning it, or renewing the lease.  

Buying equipment typically means financing it or purchasing it outright. If you finance equipment, that usually involves taking out a loan and making payments until the loan is paid off.  

The decision to lease or buy should align with your business goals, financial situation, and operational needs. It can help to analyze the total cost of ownership compared to the total cost of leasing over the equipment’s expected life. This can include the purchase price and lease payments as well as maintenance, insurance, and potential resale value.  

A business equipment lease calculator can help you get started. It’s also a good idea to consult with a financial advisor for insights into the best option for your specific circumstances.

Here are some things to consider when evaluating whether to lease or buy.  

• Initial Costs. Leasing typically requires lower upfront costs compared to financing, which can involve a significant down payment.
• Ownership. Financing leads to ownership of the equipment, allowing for asset appreciation and potential resale value. Leasing does not provide ownership unless you have the option to purchase at the end of the lease term.
• Cash Flow Impact. Leasing can help improve cash flow by spreading payments over time without the burden of ownership costs. Financing, while leading to ownership, may strain cash flow due to higher initial payments and ongoing maintenance costs.
• Tax Implications. Lease payments may be deductible as business expenses, while financed equipment can provide asset depreciation benefits. Understanding the tax implications of each option is crucial for financial planning. Consult with a tax professional to understand the tax benefits of both options.  
• Flexibility. Leasing can offer more flexibility to upgrade equipment as technology evolves, while financing could lock you into ownership of equipment that may become obsolete .
• Long-Term Costs. Over time, leasing could be more expensive than financing, especially if you keep the equipment for an extended period. A thorough cost analysis can help determine the most economical choice. An equipment loan calculator or leasing equipment calculator can also help provide some insight.  

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Understanding Lease Types

Leasing equipment can be a popular choice for many small businesses thanks to its flexibility. There are many different types of lease options available. Some common lease options include:  

• Fair Market Value (FMV) Lease allows the lessee to make payments for the use of the equipment with the option to purchase the equipment at the end of the lease term for FMV.  
• $1 Buyout Lease typically means the lessee pays a nominal amount (usually $1) at the end of the lease term to own the equipment.  
• 10% Purchase Option Lease allows the lessee to purchase the equipment at the end of the lease term for 10% of its original value.
• Capital Lease is treated as an asset on the balance sheet. This means the lessee may claim depreciation and interest deductions. It is typically used for long-term equipment needs and is similar to a purchase.
• Operating Lease is considered a rental agreement and does not appear on the balance sheet. The lessee will not own the equipment at the end of the lease term.  

For many, the type of lease you will choose may depend on your financial strategy and accounting preferences. While a leasing calculator can provide you with an overview, it's important to discuss your options with a financial advisor to help you choose the right lease structure for your business.

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Factors That Impact Your Payments

In addition to lease type, interest rates, and creditworthiness also come into play when determining lease payments. For example, when interest rates are low, lease payments also tend to be lower.  

Similar to bank loans, lease payments also consider creditworthiness. A higher credit score typically results in more favorable lease terms, including interest rates and payment structures. Maintaining a strong credit profile can enhance your chances of securing more advantageous leasing agreements or loan terms.  

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Tax Benefits and Accounting Considerations for Equipment Leasing

It’s best to consult with a tax professional or CPA to explore the tax benefits and accounting considerations when determining whether leasing or buying is best for your business.  

Here are some things to consider discussing with your financial professional regarding taxes.  

• Tax Deductions. Under Section 179 of the IRS tax code, businesses can deduct the full purchase price of qualifying equipment and software purchased or financed during the tax year. Some leased equipment may qualify if it meets specific criteria.  
• Lease Payment Deductions. Lease payments for equipment may be fully deductible as a business expense on your tax return.  
• Depreciation Rules. Businesses can claim depreciation on owned equipment over the useful life of the asset. This does not apply to leased equipment.  

When it comes to accounting, here are some topics to review with your CPA, accountant, or bookkeeper related to equipment leasing to help ensure your financial statements follow the most recent lease accounting standards.

• Income Statement. Lease payments are recorded as operating expenses which can reduce taxable income.  
• Balance Sheet. Many leases must be recognized on the balance, while others do not. It is best to consult with your financial professional to make sure you follow the most up-to-date accounting standards.  
• Financial Ratios. Leases can be considered liabilities which can affect key financial ratios.  

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Equipment Financing: Estimating Loan Costs

For business owners not interested in buying equipment outright or leasing, financing the equipment purchase offers another option.  

Typically, businesses can secure loans from banks or financial institutions to purchase equipment. The loan amount usually covers the equipment's purchase price, and the borrower repays the loan over a specified term with interest.

Obtaining a loan usually starts with a loan application. The lender will assess the application based on creditworthiness, business financials, and the equipment’s value. If the loan is approved, the lender will offer the terms of the loan, including loan amount, interest rate, repayment schedule, and any fees. Upon finalizing the loan, the borrower will make regular payments, which include principal and interest, until the loan is paid off.  

Interest rates for equipment loans will vary based on market conditions, the credit score of the borrower, and the length of the loan. An equipment financing calculator can help you evaluate different loan scenarios based on the different inputs. For example, a 7 year equipment loan calculator can help you estimate loan payments, principal, and interest for a 7-year loan.  

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Common Mistakes When Leasing Equipment  

Understanding the different aspects of equipment leasing can help you make a more informed decision when evaluating equipment financing options.  

Here are some tips to help you avoid common mistakes to be aware of.  

• Not Understanding Lease Terms Before Signing. Sometimes businesses rush into signing a lease without fully understanding the terms and conditions. It's crucial to read the lease agreement thoroughly and clarify any ambiguous terms with the lessor. Understanding the implications of the lease duration, payment structure, and end-of-lease options can help you plan.  
• Underestimating Total Lease Costs Over Time. Businesses may focus solely on monthly payments and overlook the total cost of the lease, including fees, maintenance, and potential buyout costs. Conducting a comprehensive analysis of the total cost of ownership (TCO) can help make a well-informed decision.  
• Failing to Negotiate Better Lease Terms. Many lessees accept the initial terms offered by the lessor without attempting to negotiate. While not all terms are negotiable, it doesn’t hurt to try to secure more favorable terms, such as interest rates, payment schedules, or maintenance responsibilities.  
• Selecting the Wrong Lease Type for Business Needs. The wrong lease type can lead to financial strain. Businesses should evaluate their equipment needs, usage duration, and long-term goals to help them choose the most suitable lease type for their needs.  
  

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Use Our Equipment Lease Calculator to Help Plan Your Business Expenses

If you’re considering investing in equipment for your business, you can use our equipment lease calculator to estimate different options to determine the best course for your business.  

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