Business owners often opt to lease rather than buy heavy machinery, sometimes resulting in different tax consequences and varying monthly payments. Tax laws in some nations can make it advantageous for some business owners who are leasing heavy equipment to take out a capital lease, while others may benefit from an operating lease. Additionally, business owners sometimes get better deals on financing when leases are provided by specialized lenders rather than major banks.
An operating lease is an agreement under which a property owner rents a piece of property to another individual or business for a set period of time. In comparison, a capital lease is an agreement in which the lessee assumes an ownership stake in the property at the end of the lease term or has the right to buy the financed property for a pre-determined price. Most types of heavy machinery are expensive and purchase loans may result in large monthly payments. A business owner who takes out a capital lease can pay lower monthly payments than on a purchase loan but still have the opportunity to assume full control of the equipment at the end of the lease term.
Accounting laws vary between nations but operating leases are normally reported as liabilities. With a capital lease, the lessee has an ownership interest in the equipment which means that the lease is often reported as both an asset and a liability. A business owner may have the option to claim depreciation of the heavy machinery as a tax deduction but also deduct the lease payment as a business expense. Therefore, in many instances capital leases are more tax efficient than operating leases.
Machinery eventually becomes obsolete and most types of machinery gradually lose value over time. While a lessee can attempt to predict the depreciation of the machinery at the outset of the lease term, other factors such as the development of new technology could cause the equipment to drop in value more quickly than anticipated. When leasing heavy equipment, some business owners insist on inserting a clause in the lease agreement that prevents the lessee from having to pay any more lease payments if the sum total that the lessee has already paid at any point exceeds the current value of the equipment.
Business owners who are leasing heavy equipment sometimes obtain financing from major banks. However, some small firms specialize in financing machinery and business equipment. Since these lenders are more familiar with the machinery, the interest rates are often lower than rates available on leases through major banks. Additionally, it can prove difficult for start-up firms to set up leases since few major banks lend to new businesses. Small firms and venture capitalists are often more willing to finance such entities.