It's not always clear whether it is more cost-effective to buy or rent equipment, and each business and type of equipment will be different, but if you choose to lease, you can opt for an operating lease, a finance lease, or a contract hire.Get working capital
If a business needs equipment to operate, it will either have to purchase via a business loan or lease it. Under an equipment lease, a business owner will rent the equipment for a fee, and at the end of the lease, there is an option to either keep the equipment (if paid up in full) or return it for a newer model, depending on the type of lease.
Small business owners looking to purchase equipment for their business won’t have to pay cash for it upfront. To procure the latest equipment without paying a large amount of cash at once, you have three finance solutions: operating lease, finance lease, and contract hire.
If a business owner wants to have use of equipment but not the ownership then an operating lease is the best option. The lender gives the business owner the use of the equipment over an agreed timeframe, with no option to outright purchase the asset at the end of the lease agreement. Operating leases usually run for less than the useful life of the equipment, so the lender will expect to be able to sell the equipment at the end of the lease (residual value).
Allow companies greater flexibility to upgrade all types of equipment, which reduces the risk of obsolescence.
Risks remain with the lender as the lessee is only liable for the maintenance costs.
Operational expenses are fully tax deductible.
Only one monthly repayment.
No balloon payment, so it is relatively easy to bear the cost of a vehicle.
A business finance lease is a good way to get the equipment you need without the high upfront costs. The leasing company buys the asset and rents it to you for an agreed lease period. In contrast to an operating lease, all of the risks and rewards of ownership of the equipment fall to the lessee.
You can think of a finance lease as a commercial rental agreement, and the following steps are typical:
Step 1: The business owner selects equipment that they need for their business
Step 2: The lender purchases the equipment
Step 3: The lender and business owner enter into a legal contract, which gives the business owner the right to use the equipment for a set amount of time
Step 4: The business owner makes monthly repayments in return for use of the equipment
Step 5: The lender receives the cost of the asset plus interest
Step 6: At the end of the lease agreement, the business owner is given the option to take ownership of the equipment
Benefits of a finance lease for equipment
No cash upfront
Lower monthly repayments
Better for cash flow than purchasing
Tax benefits (payments can be expensed rather than capitalised and depreciated)
Quick approval (24-hours)
Preserve capital for use in company growth initiatives
No technological obsolescence
One of the easiest ways to rent equipment is the all-inclusive contract hire lease. It combines all of the benefits of an operative lease, but with additional maintenance packages, for a fixed monthly price. Once an upfront rental fee is paid, you can benefit from lower fixed monthly payments, and can return the equipment at the end of the lease agreement. It’s important to note that similar to a finance lease, you can offset the rental fees against taxable profits, as they are also considered a business expense.
Easy on your budget due to low rental payments
Affordable pricing (lower upfront costs)
Predictable fixed-term and fixed-interest payments
Tax benefits via rental fees lowering taxable profits
Easier to budget as contract hire includes maintenance for running costs
So, what are the benefits of leasing vs. buying equipment?
Full ownership of the equipment
Lifetime cost is cheaper
Asset on your balance sheet
Depreciation allowed on equipment
Full control of equipment
Can sell the equipment after using it
No upfront payment is required
Terms are more flexible (e.g., can buy out lease)
Can test out equipment before committing
Maintenance costs included
Payments are tax-deductible
More accessible with bad credit businesses
Easier to upgrade after your lease expires
Easier to acquire more quickly
Need more cash or credit upfront
Cannot always test out the equipment before purchasing
Responsible for maintenance and replacements
Risk being stuck with outdated equipment
Increase liabilities on the balance sheet, which could prevent you from borrowing more money
You don’t own the item while leasing it
Higher lifetime costs
Depreciation isn’t tax deductible
Obligation to stick with the lease due to contractual obligations
Break clause for ending the lease contract before the agreed date
Operating leases may appear as a liability on your balance sheet
Every business has different needs and requires a level of support that facilitates further business growth. At Funding Options, we provide SMEs access to the most extensive range of business loans, business lending and alternative finance on the market.
Through our innovative technology, Funding Cloud™, we can quickly and efficiently introduce applicants to providers, each regulated by the financial conduct authority. Since we started in 2011, we’ve helped more than 11,000 businesses get the finance they need quickly and easily. That adds up to over £0.6B in funding for businesses in the UK and the Netherlands.