Commercial Equipment Leasing and Commercial Equipment Financing are two distinct methods for acquiring equipment for business purposes. While both options provide avenues to access equipment without high upfront costs, they differ in ownership, payment structure, and overall financial implications. 

We covered types of Equipment Financing in a previous article. Here's a breakdown of each approach:

Commercial Equipment Leasing: Commercial equipment leasing involves renting equipment from a leasing company for a specified period. The lessee (business) pays regular lease payments to the lessor (leasing company) for the right to use the equipment. 

Here are some key points:

1. Ownership: With leasing, the lessor retains equipment ownership throughout the lease term. The lessee has the right to use the equipment but does not own it. Basically, qualifying for a long-term rental. Accessibility may be harder for new businesses depending on their financial situation. Three years in business, a principal with clean credit, two years of bank statements, along with decent equipment will get the deal done!

2. Upfront Costs: Leasing generally requires minimal upfront costs. The lessee typically pays a security deposit and the first lease payment. However, the overall financial burden is lower than equipment financing.

3. Payment Structure: Lease payments are usually fixed for the lease term. The lessee pays regular payments (monthly or quarterly) over the agreed-upon period. Lease terms can vary, ranging from months to several years.

4. Maintenance and Repairs: The responsibility for maintenance and repairs may differ depending on the lease agreement. Some leases may include maintenance and repairs as part of the package, while others require the lessee to handle these costs.

5. Flexibility: Leasing provides flexibility to upgrade equipment at the end of the lease term. It allows businesses to access the latest technology without committing to long-term ownership.

6. Tax Benefits: Lease payments are often considered operating expenses, which can be tax-deductible for businesses. However, tax laws and regulations may vary, so consulting with an accountant or tax advisor is essential.

Commercial Equipment Financing: Commercial equipment financing involves securing a loan or financing arrangement to purchase equipment. The business borrows funds from a lender and repays the loan over time. 

Here are some key points:

1. Ownership: With equipment financing, the business initially owns the equipment. The lender holds a security interest in the equipment until the loan is fully repaid. Easier access for new businesses with lower equipment cost entry points.

2. Upfront Costs: Financing typically requires a down payment, ranging from 10% to 20% of the equipment's purchase price. The business is responsible for the initial investment.

3. Payment Structure: Financing involves regular payments (monthly or quarterly) over the loan term, which can range from several months to several years. Payments include both principal and interest.

4. Maintenance and Repairs: The business is responsible for all maintenance and repair costs associated with the equipment. This includes routine servicing, repairs, and any necessary upgrades.

5. Ownership Benefits: As the equipment owner, the business can use it beyond the loan term without additional costs. Additionally, the equipment's value can be leveraged for future financing or as collateral for other business needs.

6. Tax Benefits: Depending on the tax laws in a particular jurisdiction, businesses may be eligible for tax benefits related to equipment depreciation, interest payments, or other applicable deductions. It's advisable to consult with a tax professional to understand the specific tax implications.

In summary, commercial equipment leasing involves renting equipment for a specific period, providing flexibility and lower upfront costs without ownership. Commercial equipment financing involves purchasing equipment through a loan, allowing ownership benefits but requiring higher upfront costs and responsibility for maintenance. The choice between the two depends on the business's financial situation, equipment needs, long-term plans, and tax considerations. It’s about challenging businesses to last longer and work their way up over time. Operators end the day less beat up with more left in the tank with better equipment. We’ll take you through that evolution. Evaluating both options carefully and consulting with financial advisors with a service background to make an informed decision is recommended.

On February 25, 2016, FASB issued Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842). ASC 842, also known as the "Lease Accounting Standard for Leases," is a collection of accounting rules issued by the Financial Accounting Standards Board (FASB) in the United States that involve all entities that report under Generally Accepted Accounting Principles (GAAP).

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Commercial Finance Now does not provide tax, legal or accounting advice. This post has been drafted for informational purposes only and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your tax, legal and accounting advisors before considering any tax treatments.