With equipment leasing, you don’t own the equipment outright. Rather, a lender buys a piece of equipment from a vendor, and then rents it out to you for a monthly payment. At the end of your lease, you can choose to purchase the equipment, renew your lease, or return the equipment.
There are two main types of equipment leases: operating leases and capital leases. Here’s how they differ:
Operating leases (OL) – has low monthly payments and gives the business owner the option to own the equipment at the end of the lease term by paying its then-fair market value.
Capital leases (CL) – has a higher monthly payment and is structured like a loan. The difference between the OL and CL is the CL doesn’t appear on the company’s balance sheet. A $1 or 10% of the purchase price buyout is established for the end of the term.