An equipment lease is a contract between the owner of the equipment and a lessee who wants to use the equipment for a specific period in exchange for set payments. In some cases, the lease allows the lessee to purchase the equipment at the end of the term.

Leasing gives business owners access to vehicles , machinery and equipment that they may not be able to afford otherwise. There are generally two types of equipment leases, capital leases and operating leases.

 

Capital Leases

Capital leases, which are usually long term , generally cannot be cancelled by the lessee. Many companies use capital leases to obtain long-term access to a vital piece of equipment. For example, a manufacturer might lease a production machine under a capital lease because they'll use the equipment daily over several years. A company with a warehouse might lease forklifts and other equipment for the same reason.

Most capital leases permit the lessee to purchase the equipment at the end of the term . While leasing equipment under a capital lease agreement, the lessee is responsible for maintaining the equipment. They will also be required to obtain insurance to protect the equipment from damage or theft and pay any taxes associated with the equipment.

 

Operating Leases

Operating leases are short-term rentals, allowing a company access to equipment for a shorter period than capital leases. The lessee can cancel the lease with prior notice and can return the equipment before the term has expired. With an operating lease, the lessee does not have the right to purchase the equipment.

 

Closed-end and Open-end Leases

Leases can also be categorized as closed-end or open-end leases:

• Closed-end leases: The lessee is responsible for maintaining the equipment while it's in their possession, but they can return the equipment at the end of the lease term without any further obligation.
• Open-end leases: The lessee is responsible for paying the lessor for any loss in value of the equipment while it was in their possession. This can be risky if the equipment becomes obsolete.