Equipment Leasing

By Bethany Ramos

Heavy equipment is a huge investment for your business - skid steer loaders, forklifts, excavators, and the like can cost tens of thousands of dollars apiece. Financing heavy equipment is the best way to get the equipment you need without breaking the bank, and heavy equipment leasing is the most popular source of financing.

Though lessors may have different names for them, you will find that there are two main types of heavy equipment leasing:

1. Finance
2. True

Finance leases

Finance leases can also be called capital leases, conditional sales, or dollar buy out leases. This type of lease is best if you intend to keep the equipment at the end of the lease because they include the option to purchase the equipment for a nominal fee.

• Payment terms for heavy equipment leases tend to be around the expected useful life of the equipment.
• Finance leases offer the benefit of claimed ownership for tax deduction purposes.
• Government finance lease purchases may provide more flexible terms and lower interest rates to eligible non-federal agencies in need of heavy equipment.

True leases

True leases are also called tax leases, operating leases, or FMV (fair market value) leases. They do not usually span the full expected life of the equipment. When the lease ends, you can either walk away from the equipment or purchase it at fair market value.

• Payments on true leases generally tend to be lower than those on finance leases because lessors have the opportunity to resell the heavy equipment when the lease ends.
• Short-term true leases can be used as an alternative to preserve a business's existing line of credit.
• Flexible lease structures may offer equipment add-ons throughout the life of a lease term.

Which type of options is best for your company?

Virtually all industrial, medical, commercial and office equipment can be considered for a Finance Lease and a True Lease. It can be something as simple as a new office copy machine or more complex machinery such as an internal combustion forklift with a 5000 lb. capacity and pneumatic tires.

Taking the more expensive example, the forklift would cost a company in the neighborhood of $25,000. Depending on the credit of the company leasing the equipment, a monthly Finance Lease payment would be $600 for 60 months. The same forklift on a True Lease would be closer to $479 per month for 60 months,

Can heavy equipment leasing reduce jobsite risk?

Leasing instead of buying heavy equipment in the construction or agricultural industry can reduce both financial and physical risk on-the-job. Equipment leasing benefits include:

• Improved cash flow to offer added flexibility with funds that would have been used to buy brand-new equipment.
• Safer equipment selection tailored to specific job needs, especially in seasonal work.
• Shorter lease terms for small job needs to save money over the long term.
• Potential for early lease buyout to purchase frequently used equipment at a lower price.

Most construction companies can immediately benefit in both profit and safety by managing heavy machinery use with leases. For example, specialty equipment that can often be expensive and hard to come by can be leased month-to-month for the span of a particular project. The added cost of leasing such equipment can be factored into a bid for each new project.

Tax implications of heavy equipment financing

One of the main benefits of financing heavy equipment using true leases is that you may be able to fully claim lease payments for tax purposes. The IRS, in contrast, considers finance leases little more than installment purchase plans. Make sure you discuss the tax implications of your financing plans with an accountant before signing any contract.