How does business leasing work?

With business leasing, your company pays a fixed monthly payment to use a piece of equipment for an agreed period, without having to pay the whole purchase price up front.

Once you have read this article, you will understand the pros and cons of equipment leasing, a walkthrough of how it works in practice, and when it is a better solution than a loan or cash purchase.

What is business leasing?

Business leasing is an agreement where a lessor buys the equipment your business needs and makes it available for a fixed monthly payment. During the agreed period you have the right to use the equipment.

This differs from a bank loan, where the business buys and owns the equipment itself from day one, and from a cash purchase, where the whole amount is paid straight away.

With leasing you pay for the right to use the asset during the lease period, and typically end up owning the asset after the period by paying the pre-agreed residual value.

How equipment leasing works

1. You describe your need. Which equipment, roughly what price, and how long a period you have in mind.
2. The lessor carries out a credit assessment of the business, typically based on accounts, operations and any security.
3. You receive an offer with monthly payment, term, residual value and any down payment.
4. The agreement is signed and you get the equipment delivered.
5. You pay the fixed payment throughout the term and use the equipment in your operations.
6. When the agreement expires one of three things typically happens: you buy the equipment at the agreed residual value, you extend the agreement, or you return the equipment.

What can businesses lease?

Virtually all business equipment can be leased. The most common categories:

• Machinery - production machinery, construction and agricultural machinery, tools for construction and industry.
• Warehouse equipment - trucks, racking, conveyors and other equipment for warehousing and logistics.
• IT - computers, servers, network equipment and software licences with hardware.
• Printers and office machines - copiers, large-format printers and production printers.
• Office furniture - desks, office chairs and fit-out when setting up new premises or moving.
• Fitness equipment - cardio and strength training equipment for fitness centres and company fitness facilities.

Is your equipment missing from the list? That does not change the principles in this guide, as most business assets can be leased, regardless of industry.

What is typically included in a leasing agreement?

• The equipment price. The acquisition cost of what you are leasing.
• The term. Typically 24-60 months.
• Down payment. Any first payment that lowers the ongoing payment. A leasing agreement can also be made with no down payment.
• Interest/financing costs. The lessor's price for making the capital available. Often considerably more favourable than a bank loan.
• Residual value. A pre-agreed amount that must be paid when the agreement expires.

Benefits of equipment leasing

Preserved liquidity. You avoid tying up the entire acquisition cost in the equipment and can use the capital for operations, hiring or growth. Especially relevant for expensive equipment, where a cash purchase would otherwise have a big impact on liquidity

Predictable finances. A fixed monthly payment makes budgeting simpler than a large one-off expense, and you know the cost of the equipment month by month throughout the agreement.

Easier to upgrade. With shorter terms you avoid being stuck with outdated equipment. This is especially valuable for types of equipment that develop quickly, such as IT and production technology.

Can keep equipment off the balance sheet. Depending on the type of agreement and accounting practice, leasing can affect the company's key figures differently than a purchase would. Talk to your accountant about what specifically applies to you and your business.

Access to equipment without a full credit line. Leasing can make it possible to acquire equipment even when a bank loan is not an obvious option, because the lessor in practice has security in the equipment itself.

Service can be included in the payment. Some agreements bundle service, maintenance and insurance into the fixed price, so you do not have to manage them as separate items. It must always be stated explicitly in the offer, though, as it is not a fixed part of leasing as a model.

Things to be aware of when you lease

Commitment period. Leasing agreements are typically entered into for a fixed period, which gives predictability in the budget. It is therefore an advantage to choose a term that fits the business's expected needs and plans for the equipment.

The residual value. The residual value is set based on an expectation of the equipment's value at the end of the lease period.

Credit approval is a prerequisite. A credit assessment is a natural part of the process and ensures that the leasing solution matches the business's financial situation and framework.

The equipment is harder to change or customise. Leasing gives access to equipment without a large initial investment. As the equipment is formally owned by the lessor, major or permanent modifications may however require prior approval.

Leasing, loan or cash purchase — which suits your business?

There is no single right answer. It depends on the equipment, how long you will use it and the business's liquidity.