Different types of Equipment Lease:

Although most equipment leasing companies use different names to describe different types of leases, there are some which may use the same name for most of these types. To find out the exact type of lease you will have to review your leasing documents or will have to ask the leasing company to explain.

In this article were listing out a few types of equipment leases along with information on how these work, the benefits of each and the best use of the lease type.

True lease:

This is also referred to as operating lease.

Ideal for: this type of lease should be considered for those pieces of equipment which lose their value very fast. The loss in value could be for reasons like depreciation or technology becoming obsolete. For instance certain computer equipment which becomes useless as a better technological replacement arrives in the market.

The working: as per this lease agreement the right to ownership of the piece of equipment remains with the leasing company throughout the period of please. There are no predetermined buyouts set under the agreement. And the small business taking the equipment on these is able to show up the payments as operating expenses.

Advantages: the small business gets to enjoy a comparatively lower payment under this lease set up and at the same time enjoys tax deductions for the payments made. At the end of it the small business has three different paths to choose, the first one is to return the equipment back to the leasing company, the second one is to purchase the equipment at the fair market value and lastly to extend the term of lease.

Finance lease or capital lease:

Ideal for: this type of lease is best used for the pieces of equipment that the small business wishes to own at the end of the lease agreement.

The working: the purchase price of the equipment along with interest for the term is spread over the entire length of the agreement. In each payment that the small business makes it is paying for both the principal amount as well as the interest.

Advantage: it helps the small business to become the owner of equipment by the end of the term. At the end of the lease period the small business may be required to make a small payment which is generally a small percentage of the original purchase price of the equipment so as to get the ownership transferred into the businesss name.

Skip Lease

Ideal for: this is the most suitable type for those small businesses which require a highly flexible payments schedule Because of seasonal variations in the business such as agricultural companies, recreational services firms, resorts and so on.

The working: the payment structure is very flexible and allows the small business to specify the months in which it will be making payments and those in which it will not be making payments. The small business can decide on the payments schedule in relation to its cash flow.

Advantage: the flexibility in payments helps the small business to bring about more stability in its cash flow.

Sale-Leaseback

Ideal for: the small businesses which have already purchased the equipments but feel that lease would have been a better alternative and so would want to shift on to a lease program.

The working: the equipment that has already been purchased by the small business is sold over to the leasing company. The leasing company gets the ownership title for the equipment and then it leases it back to the business. The main criteria however for this type of the leasing is that the equipment should have been purchased within the last 90 days.

Advantage: it helps the small business to increase its cash for the purpose of investment or for improving cash flow. This way the business owner is able to put back the money into his small business so as to use it on investments where the money will appreciate rather than depreciating with the equipment.

60 or 90-Day Deferred Lease

Ideal for: this is ideal for the purchase of equipment that is required to improve their operations or for the purpose of development and is not expected to provide immediate revenue generation. Secondly it can be used to cater to urgent equipment needs when the cash flow is tight but is expected to improve within 2-3 months.

The working: a deferred lease can be prearranged as a finance or true lease. The business is not required to make any advance payments and the payments start only after 60 or 90 days as per the agreement.

Advantage: the small business can cater to an urgent need without having to pay money upfront also avoiding payments for two to three months.

Master Lease

Ideal for: this is suitable for a small business which expects its requirements for leasing to increase over time.

The working: the addition of equipments under lease can be done by creating separate lease schedules over the specified term. The basic terms and conditions are mentioned in the master lease and are applicable to all schedules that will get added on later. What can vary for each lease schedule is the length of the specific lease and the option for end of term.

Advantage: the small business doesnt have to go thought the long procedure for each addition of equipment making it very convenient for the small business to acquire more equipment.

Municipal Lease

Ideal for: this is applicable only to the government organizations, both at the local and state level, that desire to acquire new equipment.

The working: what sets this type apart from the standard business leases is the tax structure. To understand the options and working better you need to consult your financial advisor.

Advantage: they are specifically designed to make the acquisition of new equipment easier for the governmental organizations.

Step Up Lease

Ideal for: this should be a preferred method for those equipments which are expected by the business to facilitate higher profitability over a period of time.

The working: the agreement is such designed that the payments will rise periodically over the life of the lease as per the pre-agreed schedule.

Advantage: is an effective method to match the payments with the current cash flow.

These were some of the most common lease types; having understood them the business will be in a better capacity to decide what will suit it best depending on things like cash flow and the utilization of the equipment.