What Is a Capital Lease Agreement

What Is A Capital Lease Agreement?

What Is a Capital Lease Agreement
What Is a Capital Lease Agreement

Why buy when you can borrow?

Businesses need fixed assets. However, buying things like property, and equipment, can leave a company depleted financially. That’s where capital lease agreements come in.

If you’ve ever rented an apartment or home, you were party to a lease. However, residential housing leases are much more straightforward than complex business agreements.

Residential leases are for a fixed amount of time and don’t present the opportunity for financial gain. At the same time, a capital agreement can provide business owners with a chance to own the item they’re leasing.

What other advantages do business leases present? Read on to find out!

How a Capital Lease Works

A capital lease agreement, or finance lease, allows your company to take on expensive equipment and machinery. The kind of equipment that would otherwise be out of reach. You might think that a finance lease is just a standard lease for costly items based on the name.

However, these agreements function a lot differently. For instance, there are multiple types of finance leases. The 3 most popular are the operating, total payout, and partial payout lease.

Operating Lease

Much like renting, you can terminate operating leases if you want to. There’s also no requirement to purchase the leased property at the end of the lease period. This is one of the most common capital leasing agreements for businesses because it allows you to test out new equipment without committing right away.

It gives companies time to see if what they’re buying will meet their needs. They can test how well the equipment performs under real-world conditions. Chances are, you’ll opt for an operating have a little more info.

Full Payout Lease

A total payout, or a valid lease, requires companies to pay off the total price before ownership transfers to your company. The lease term is usually for 3 or 5 years. If full price isn’t met, ownership won’t transfer.

Partial Payout Lease Agreement

Finally, we have the partial payout lease agreement. This type is significantly more flexible than the previous two because companies can pay off the remaining balance between 1 and 10 years. If you’re a new company, and your finances fluctuate a lot, we suggest you go for a partial payout option.

Types of Charges

The type of charge you receive for capital leases varies depending on the terms of your contract. You could end up paying interest or a combination of interest and principal payment during that period. Some companies only offer interest payments, making them more affordable initially but much pricier in the long run.

There’s also an element of transparency involved when it comes to understanding capital leasing agreements. The amount due is clear from day one, so there are no surprises down the line. The cost should include all fees associated with the rent, like maintenance and insurance.

What Are the Benefits of Finance Leases?

Capital leasing agreements are the perfect solution when you need to use an asset for a set period. You don’t have to spend all your time or energy researching which equipment will best suit your needs because you can take advantage of renting first.

If the item doesn’t work out, then at least you’re not stuck with something you’ll never use again! Finance lease agreements are also flexible when it comes to how much companies pay each month or year.

Lenders factor in what you can afford to do. Thanks to capital leasing agreements, it’s easier than ever before for businesses to get their hands on new technology.

There are plenty of options, and that’s one of the best things about capital leasing agreements. You’re not stuck with the same old, boring equipment you’ve used for years and years.

You can get your hands on things like 3D printers or new manufacturing equipment. You could even start a company based on 3D printing ideas! Finally, businesses can take more control over what they use and how they do their jobs.

Do You Have to Commit Long-Term?

Finance lease agreements are significant because you don’t have to put down money to use something in many cases. But, if you decide later on that it’s something your business isn’t interested in anymore – no problem!

You can return the equipment once you’re finished with it, and there’s usually no penalty for doing so. The only thing to remember is that some companies may charge a small fee depending on how long you’ve been leasing the item.

However, this would be a very nominal fee or even just a standard deduction from your deposit if you have one. In most cases, the price of your lease agreement will stay precisely where it was when you made the switch to buying instead of renting.

There are also options available if things change before the end of your leasing contract! If you want to break off early, then it’s possible that your company won’t have to pay all remaining months upfront. Companies may ask for a reduced fee if you want to be released from your contract early.

Read the Fine Print

There are situations where it’s possible to change the terms of your lease agreement. However, some companies don’t allow you to make any changes for at least two years. Fail to comply, and they’ll charge you an early cancellation fee.

Don’t let the fine print scare you away, though. Speaking to a trusted financial advisor should help clear things up. Talk to an advisor about what kind of options are available in your region!

How to Expense Finance Leases

Will you be able to expense your lease payment? Typically, lease agreements don’t show up as expenses on company financial statements at first. Instead, they pop up once the company begins paying off any initial costs of leasing the equipment.

In other words, the payment process doesn’t start until the initial lease period is over. Some companies can still claim these lease payments as an expense during their operational periods instead of using what is known as operating leases.

Make the Right Financial Choice

Could you benefit from using financing to acquire more oversized items? Items that perhaps you couldn’t afford if you had to pay for them outright? Then a capital lease could be the perfect choice for your company.

Since you won’t know for sure until you speak with an advisor, reach out to a lender today. Explore all of your financing options, and be sure to ask a lot of questions. Ask the lender what the lease-to-own options are and how long the financing term will last!

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