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Commercial Equipment Acquisitions: Leasing vs. Buying for Your Business

If you own a business, there is a strong likelihood that you will enter into a commercial equipment lease or sale agreement at some point. With that in mind, it is important to gain an understanding of the difference between leasing and purchasing equipment as well as the most common types of lease agreements.

What Is an Equipment Sale Agreement?

Commercial equipment can include anything from manufacturing and restaurant equipment to vehicles and medical equipment. An equipment sale agreement is an agreement between one party that wishes to sell equipment and another party wishing to purchase the equipment. A typical equipment sale agreement will clarify the rights and obligations of the seller and buyer, the terms of the sale, and the remedies for a breach of the contract.

What Is a Commercial Equipment Lease Agreement?

Commercial equipment can be prohibitively expensive, causing many business owners to choose to lease instead of purchasing equipment outright. In fact, more than 80 percent of U.S. companies lease equipment instead of buying it.

A commercial lease agreement is a contract that allows a lessee (the party leasing the equipment) to lease equipment from a lessor (the party that owns the equipment) for a specific period of time. Like other lease agreements, a commercial equipment lease agreement requires the lessee to make periodic payments for the duration of the lease agreement in exchange for the right to use the equipment; however, the lessor retains all ownership rights to the equipment.

What Are the Most Common Types of Commercial Equipment Lease Agreements?

Capital Lease – A capital lease agreement is typically used for high-value equipment when the lessee plans to use the equipment long-term and/or wants the option to purchase the equipment at the end of the lease term. The lessee in a capital lease agreement is usually responsible for maintaining the equipment, paying taxes related to the equipment, and carrying insurance on the equipment for the duration of the lease agreement. In addition, the equipment is recorded as an asset and/or liability of the lessee for tax and financing purposes. The most significant aspect of a capital lease, however, is that the lease agreement usually cannot be canceled.

Operating Lease – When the lessee only needs the equipment for a short period of time, an operating lease agreement is often the best option. Typically, the lessor is responsible for maintaining the equipment, paying taxes, and insuring the equipment during the lease period. In addition, the lessor retains the ability to record the equipment as an asset and/or liability. Unlike a capital lease, an operating lease can traditionally be canceled, although the lessee may be required to pay a penalty for cancellation.

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