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Equipment leasing allows your business to acquire new or used Cat® equipment without buying it outright. Leasing typically offers lower monthly payments than a single lump sum payment or a traditional heavy equipment loan, giving your business more financial flexibility. Leasing heavy equipment also allows you to use the newest model of a machine or one that fits your needs for a specific construction project.
At Cat® Financial, we offer equipment leasing for both new and used heavy equipment. Below, we cover the fundamentals of leasing heavy equipment, from how it works to the benefits it can present to your business.
Running equipment that includes the latest technology and features can be costly to buy outright, but heavy equipment leasing may be the right choice for your business. You can obtain a lease for both new and used equipment from a lessor — the entity that owns the leased equipment. When leasing new Cat equipment, the lessor is Cat Financial. The lessor will draft a lease agreement that you'll agree upon. This agreement details how long you will be leasing the equipment and how much you can expect to pay monthly.
Equipment leasing can be used to lease items like computers, desks and file cabinets, while heavy equipment leasing is used to lease larger equipment that performs heavy-duty tasks, including:
For first-time leasers, you might consider contacting your bank, equipment dealership or equipment manufacturer. In this case, we recommend contacting your local Cat dealer, who can connect you with Cat Financial to discuss your equipment leasing options. When you choose to lease equipment, you'll be required to make regular payments to the bank, dealership or owner to use the equipment, so you want to go with the party the financial institution that makes sense for you and your business. Compared to loan payments, lease payments tend to be lower, though payments can vary when the lease ends depending on your options and how you choose to proceed.
To determine the right heavy equipment lessor, consider the following:
Leasing companies often specialize in specific industries, so find the company that can offer the right financing option for you. Some lessors like Cat Financial provide a quick approval process, so you can quickly find the right leasing agreement and get the Cat equipment you need for the job.
While your lease agreement is active, you'll get to use the equipment. Depending on the type of lease, you may have the option to purchase the equipment, while other lease options give you a choice to return the equipment after the lease term ends. If you want to buy the equipment when your lease is up, your lessor may offer it for the current market rate or lower. Read more about equipment leasing options from Cat Financial.
Though there are several benefits of leasing heavy equipment, you first need to determine whether leasing is the right choice compared to financing and purchasing outright. Below are a few of the reasons to lease machinery:
Examining these factors can also help you determine the ideal time to lease.
Once you've decided it's the right time for your business to lease heavy equipment, you can determine whether you might qualify for an equipment lease. Similar to a loan or installment sales contract, a heavy equipment lease is available to businesses that meet specific criteria. Fortunately, qualifying for heavy equipment leasing is typically relatively easy. Below are some of the qualifications that a lessor may look for to determine whether your business is eligible:
Cash flow: How's your cash flow? A lessor wants to work with a business that can handle the costs of leasing heavy equipment. This means a lessor may evaluate your annual revenue to determine whether your business qualifies. If your revenue is high compared to the cost of the machine, you may be eligible for an equipment lease.
Credit score: We all know credit scores can impact our ability to qualify for loans and credit cards. When it comes to leasing agreements, credit scores are also taken into consideration. The credit score you need to lease equipment will vary.
Business history: How long has your company been in business? This can affect whether you qualify for a lease. A lessor may want to see that you've been in business for a specific time before drafting a lease agreement.
Other factors that may determine whether your business qualifies for an equipment lease include the type of lease you want, the size of the lease, the length of the lease and the potential depreciation of the equipment. To apply, you may also need to supply the following documents:
Overall, the stronger your financial history and the better your cash flow and credit score, the more likely you will qualify for an equipment lease and receive better leasing rates and terms.
If you've determined to lease heavy equipment, your next step is deciding between the different equipment leases. For Cat Financial, we offer two equipment leases: a finance lease and an operating lease.
This type of lease can go by several names — a finance lease, a financing lease or a non-tax capital lease. An equipment finance lease typically offers the option to buy the equipment when your lease term ends. When you reach a period during the leasing agreement that you and the lessor have agreed upon, flexible purchase or return options may be available.
Financing leases can offer bargain purchase options and balloon payments at the end of the lease, which can be a significant benefit depending on your circumstances. A financing lease should also represent a significant part of the machine's projected useful life. As a result of these conditions, this type of lease may be a good option when you want equipment that is available to you for the long term and will be available for eventual ownership.
For accounting and tax purposes, your business essentially owns the machine. So your business will record your finance lease as an asset, but this also increases your liability. With a financing lease, you can claim the depreciation of the equipment on your taxes, along with the interest expenses you paid on your lease. Though you may be eligible for tax benefits associated with depreciation and interest, you may not be able to deduct the principal from the lease.
An operating lease is an equipment lease that lets your business use the equipment for a certain amount of time without becoming the owner when your lease ends. In other words, an operating lease is similar to a long-term equipment rental, which means you can avoid the risks of equipment ownership. When your lease ends, ownership doesn't automatically transfer to you, which is ideal when your equipment needs are short-term.
Operating leases are about three years, and when your lease is up, you may have the option to return the equipment, renew your lease or purchase the equipment if you want to own the machine. An operating lease can also offer benefits for qualified customers, including:
You can't list the equipment as capital with an equipment operating lease. Instead, your business accounts for the equipment as a rental expense. This can benefit your business, as the equipment isn't recorded as either a liability or an asset, and you may still qualify for tax incentives that involve this equipment. Keep in mind, however, that you may still need to include the equipment lease on your balance sheets. Be sure to consult your tax professional to learn more about potential tax benefits with leasing heavy equipment.
To help you choose between a financing lease and an operating lease, consider the pros and cons and determine which will better facilitate the operations and growth of your business. For example, an operating lease may be the better option if you need low payments and additional cash flow. If you believe you'll want to own the equipment at the end of your lease, a finance lease may be a good option.
Leasing equipment can offer many benefits to a business, especially over financing or purchasing outright. If you're limited on cash, you may want to opt for an equipment lease. Since every equipment lease is different, you can find the lease that suits the exact needs of your business. The following are some of the benefits of getting an equipment lease:
Cost-effectiveness: Applying for and obtaining a lease is one of the most cost-effective ways to get the equipment you need for the job. You may be able to skip a sizeable down payment and qualify for low monthly payments that are more affordable than purchasing the equipment through one lump sum payment. If your budget is limited or you want to keep costs down for a machine you only need temporarily, an equipment lease can provide the cost-effective solution you need.
Potential tax credits: Another one of the great benefits of leasing is the possible tax credits your business may be eligible for. Depending on your lease, your business can deduct equipment depreciation and interest on the lease payments as business expenses.
Ease of scaling your business: Sometimes, we don't anticipate how quickly our businesses grow. If your company grows quickly, leasing heavy equipment may be the best option. You'll likely upgrade to more advanced machines as you take on more work. By leasing, you can handle more work without needing to sell your existing equipment and shop around for replacements. With a lease, you can get the exact equipment you need when you need it, whether expanding or taking on unique jobs requiring specialized equipment.
Ease of updating equipment: When you lease a machine, you can return it once your lease agreement ends and you've got what you need. Then, you can avoid dealing with the depreciation of your investment or figuring out what to do with a machine that has become obsolete. Leasing can also be helpful if your company's offerings change seasonally or over time — you can lease a machine that's useful for a short period and then upgrade to the different equipment that suits your changing needs.
Options for maintenance and service contracts: The ongoing maintenance and its costs are something to keep in mind with equipment ownership. As machines age, they require more and more maintenance. This can mean your equipment has increasing upkeep needs over time. Some leasing options let you incorporate a service contract into your monthly lease payment. Cat Customer Value Agreements can help you maximize the uptime of your heavy equipment with a personalized preventative maintenance schedule.
To continue operating successfully and growing, your business needs to remain flexible and adapt to internal growth, industry disruptions and changing trends. This need for flexibility is why you should regularly review the options available for obtaining heavy equipment. Before you enter an equipment lease agreement, you should understand the lease modification process.
Reviewing your lease agreement regularly can help determine whether it's time to modify it. For example, review your lease agreement yearly on the date you obtained the equipment. Determine whether the equipment is still suitable for your business and whether it's enabling you to reach your goals. Sometimes, you may decide that modifying your lease to a long-term agreement or purchasing the equipment outright is the best next step.
As your business adapts to market changes or grows, your needs change. Fortunately, when you have an equipment lease, there are some parts of your lease agreement that you can modify. Depending on your lease, you may have the option to:
With this flexibility, you can avoid being locked into terms that are no longer ideal for your business.
Leasing equipment has many advantages, but you should also be aware of the potential extra costs you may face when your lease ends. Follow these tips to avoid additional costs at the end of your equipment lease:
Find a good lessor: The lessor you choose can significantly impact the quality of your leasing experience and the unexpected costs you may face at the end of your lease. By working with a captive financing company, you can enjoy fewer unexpected costs, as only two parties are involved.
Choose a finance lease: A finance lease offers flexible purchasing options at the end of your lease, and you may be eligible for valuable tax benefits when you choose a finance lease.
Keep the equipment in good condition: One of the easiest ways to avoid extra costs when your lease term is up is to keep the equipment in quality condition. Damage and wear and tear are common sources of additional costs for a lease. Be sure to maintain a high standard of care while the machine is in your possession.
Find in-depth articles to answer your questions about construction equipment financing, and expert tips to help you navigate today's economy as a successful business.