An Introduction to the World of Equipment Leasing

Basically, leasing itself is the act of the owner of the property to let another person to use that property for a pre-agreed upon period of time in exchange for a pre-agreed upon amount of compensation. It may apply to land, or it may apply to movable property – in this case, we are interested in equipment leasing, or leasing of movable equipment. The person who really owns the movable equipment is called the lessor while the person who agrees to the equipment leasing terms of the lessor is called the lessee.

Under an equipment leasing contract, the lessee will gain exclusive rights to use the movable equipment in question for the pre-agreed upon period of time provided this lessee keeps paying the pre-agreed upon amount of compensation to the lessor.

Equipment leasing may fall into two categories. First, the lessor may grant the lessee the rights to use the movable equipment for that pre-agreed upon period of time only. At termination of the contract or when the period of time they agreed upon has come to a close, the lessee has to return the movable equipment to the owner or lessor. The second type of equipment leasing arrangement allows the lessee to make payments while using the movable equipment, but eventually, after the pre-agreed upon amount of payments has been completely given by the lessee to the lessor and the pre-agreed upon period of use has been completed, the lessee gains the right to completely own the equipment upon payment of a contractual purchase option price to the lessor. This arrangement might be known as a lease with a possibility of owning type of arrangement.

Many corporations opt to enter into an equipment leasing arrangement rather than outrightly buy new equipment for their business operations. One reason is that many corporations lack the capital to buy new equipment. For such businesses, it makes more economic sense to simply lease equipment because it costs less for them, especially if they need the equipment only for the short term. In addition, if the equipment being leased tends to become obsolete easily (as computers do), then a company which needs up to date equipment all the time will find it more beneficial to simply lease the equipment instead. Otherwise, the company would have to keep shelling out funds to buy new equipment every time the old set becomes outdated or obsolete.

Corporations may also choose equipment leasing arrangements rather than outright purchase because an equipment leasing transaction will not be reflected on the balance sheet. This means the company can pursue getting loans from formal lending institutions since the equipment leasing transaction is not deemed a long-term debt or liability for the company. A corporation which has to sustain a prescribed debt-to-equity ratio or has debt covenants to adhere to may find it in its best interests to pursue equipment leasing arrangements instead.

In some places, equipment leasing may bring tax advantages to the lessee as well. You need to ask your tax accountant about this possibility, if you think your corporation is entitled to tax breaks this way.