Types of Equipment Leases: Definitions & Characteristics

Access to cutting-edge equipment is essential for labs and research facilities, but purchasing high-value instruments outright can be financially restrictive. For small business owners and startups, equipment leasing offers a cost-effective solution to scale operations while preserving cash flow and avoiding large upfront expenses. However, with multiple leasing options available, it’s important to choose the right equipment lease agreement that aligns with your business needs and long-term goals.

Understanding the different types of equipment leases—including operating leases, finance leases, purchase option leases, and more—ensures you make an informed decision that balances flexibility, tax benefits, and ownership potential.

In this guide, we’ll break down the most common equipment lease types, their definitions, key characteristics, and how they impact your financial strategy.

Types of Equipment Leases

Each equipment lease agreement is structured differently, affecting factors like ownership of the equipment, lease payments, tax benefits, and financial reporting. Below is a breakdown of the most widely used leasing options:

• Operating Lease
• Finance Lease (Capital Lease)
• $1 Buyout Lease
• Purchase Option Lease
• Sale-Leaseback
• TRAC Lease (Terminal Rent Adjustment Clause Lease)

Selecting the right type of lease depends on your business operations, equipment needs, and long-term financial planning. The following sections will explore each lease type in detail, including how they impact your balance sheet, tax obligations, and flexibility at the end of the lease term.

Operating Lease

An operating lease allows the lessee to use a piece of equipment for a specific period without assuming ownership of the equipment. This lease agreement is classified as a true lease, meaning the lessor retains ownership throughout the lease period, and the equipment does not appear as an asset on the lessee’s balance sheet.

Key Characteristics of an Operating Lease:

• Typically used for short-term equipment use (12 to 60 months).
• The lessee makes monthly payments, which are considered operating expenses and may be deductible for tax purposes.
• At the end of the lease period, the lessee has three options:
  
  • Return the piece of equipment to the lessor.
  • Renew the lease contract at a reduced rate.
  • Purchase the equipment at its fair market value (FMV).

When to Choose an Operating Lease:

An operating lease is ideal for small business owners and companies that need new equipment but want to:

• Lower monthly payments by avoiding a large down payment.
• Keep the cost of the equipment off their balance sheet for financial flexibility.
• Avoid the risk of obsolescence, especially for industries with rapidly evolving technology.

Since an operating lease does not transfer ownership of the equipment, it is a great fit for businesses that frequently upgrade their equipment or prefer short-term leasing options.

Finance Lease (Capital Lease)

A finance lease, also known as a capital lease, is a long-term leasing option where the lessee assumes many of the responsibilities of ownership. Unlike an operating lease, a capital lease appears on the lessee’s balance sheet, and the equipment lease agreement functions similarly to a loan.

Key Characteristics of a Finance Lease:

• The lessee is responsible for maintenance, insurance, and taxes on the equipment.
• The value of the equipment is recorded as an asset, and the lessee may claim depreciation and interest deductions for tax purposes.
• The term of the lease is typically longer, often aligning with the useful life of the equipment.
• At the end of the lease, the lessee usually has a buyout option at a predetermined price.

When to Choose a Finance Lease:

^A capital lease is best for business owners who:

• Plan to own the equipment at the end of the lease period.
• Want to take advantage of depreciation and tax benefits.
• Are leasing expensive equipment that has long-term value and won’t quickly become obsolete.

Since a finance lease allows businesses to claim tax-deductible depreciation, it is often used in equipment financing when a company intends to purchase the asset.

$1 Buyout Lease

A $1 buyout lease is a specialized capital lease where the lessee pays monthly payments throughout the duration of the lease and then purchases the equipment for $1 at the end of the lease period.

Key Characteristics of a $1 Buyout Lease:

• Higher monthly payments compared to an operating lease but with eventual ownership.
• Considered a finance lease, meaning the equipment appears as an asset on the balance sheet.
• The lessee assumes responsibility for all costs, including insurance, maintenance, and repairs.
• Offers tax benefits, including deductible depreciation and interest expenses.

When to Choose a $1 Buyout Lease:

This leasing option is best for businesses that:

• Are certain they want to own the piece of equipment at the end of the lease period.
• Can afford higher monthly payments to avoid a large purchase price later.
• Want to finance the equipment while keeping their lines of credit open.

Purchase Option Lease

A purchase option lease gives the lessee the choice to buy the equipment at the end of the lease period for a predetermined percentage of the original purchase price.

Key Characteristics of a Purchase Option Lease:

• Offers a flexible buyout based on the fair market value of the equipment.
• Typically has lower monthly payments than a $1 buyout lease.
• The lessee can decide at the end of the lease whether to purchase the equipment or return it.

10% PUT Lease (Purchase Upon Termination)

A variation of the purchase option lease, a 10% PUT lease, requires the lessee to purchase the equipment for 10% of its original value at the end of the lease term. This is a good choice for businesses that:

• Expect to buy the equipment but want lower monthly payments during the lease period.
• Need a structured buyout option without committing to full ownership upfront.

Sale-Leaseback

A sale-leaseback is a unique equipment financing strategy where a business sells a piece of equipment to a leasing company and then leases it back. This allows businesses to free up capital while continuing to use their essential equipment.

Key Characteristics of a Sale-Leaseback:

• Converts owned equipment into working capital while keeping it in use.
• The business owner makes lease payments instead of holding the asset.
• Helps improve cash flow and avoid large upfront costs.

When to Choose a Sale-Leaseback:

This leasing option is best for companies that:

• Need to raise capital without disrupting business operations.
• Own expensive equipment but prefer to spread costs over time.
• Want to free up lines of credit while still using the piece of equipment.

TRAC Lease (Terminal Rent Adjustment Clause Lease)

A TRAC lease is commonly used for vehicles and heavy equipment but can sometimes apply to specialized lab equipment. This lease allows for adjustable payment structures based on the residual value of the equipment at the end of the lease term.

Key Characteristics of a TRAC Lease:

• Typically structured as either a finance lease or operating lease.
• Provides flexibility in lease payments based on market value at lease-end.
• Often used by businesses with high-cost equipment needs.

When to Choose a TRAC Lease:

A TRAC lease is ideal for companies that:

• Need flexible leasing options for vehicles or specialized equipment.
• Want to control the residual value of the asset at the end of the lease.
• Prefer a mix of ownership benefits with structured lease payments.

When Does Equipment Leasing Make Sense for Your Business?

Now that you understand the types of equipment leases, the next step is determining whether leasing is the right financial decision for your business needs. While leasing offers lower monthly payments, tax benefits, and financial flexibility, it’s not always the best option for every company.

Key Questions to Ask Before Leasing Equipment

Before entering a lease agreement, consider the following:

• Is the equipment essential to operations? If the piece of equipment is critical for business functions, leasing can provide access without a large down payment.
• Will leasing improve cash flow? Spreading costs over a specific period instead of making a large upfront purchase can help maintain financial flexibility.
• Does the equipment depreciate quickly? If the market value declines fast, leasing may help you upgrade without being stuck with outdated equipment.
• How will it affect my balance sheet and taxes? A capital lease adds the equipment as an asset, while an operating lease keeps it as an operating expense that may be tax-deductible.
• Do I need to own the equipment at the end of the lease period? If ownership is important, consider a finance lease, purchase option lease, or $1 buyout lease.
• Can I afford early termination fees? Most lease contracts include penalties for early cancellation, so ensure the lease duration aligns with your long-term equipment needs.

Advantages of Leasing Equipment

• Preserves cash flow – No large upfront investment, keeping funds available for other business expenses.
• Access to the latest technology – Avoids obsolescence by upgrading equipment at the end of the lease period.
• Tax benefits – Payments may be deductible as a business expense, and capital leases may allow for depreciation deductions.
• Flexible end-of-lease options – Choose to return, renew, or purchase the equipment based on business needs.

When Buying Might Be a Better Option

Leasing is beneficial, but buying may be better if:

• The cost of the equipment is low enough to purchase outright.
• The equipment has a long lifespan, making ownership more cost-effective.
• You want to avoid long-term lease payments and financing costs.

Key Takeaways

Leasing equipment is a strategic way for business owners to acquire the tools they need while maintaining cash flow and financial flexibility. Choosing the right equipment lease agreement depends on your business needs, budget, and long-term goals. Whether you prefer a short-term operating lease to avoid obsolescence or a finance lease for eventual ownership of the equipment, understanding the terms, costs, and tax implications is key to making an informed decision.

Quick Summary of Equipment Leasing Benefits

• Flexibility & Cash Flow – Leasing provides access to expensive equipment without requiring a large down payment.
• Different Leasing Options – Businesses can choose between an operating lease, capital lease, purchase option lease, or leaseback based on their needs.
• Tax & Financial Benefits – Certain lease structures offer deductible payments, depreciation benefits, and balance sheet advantages.
• End-of-Lease Options – Depending on the lease contract, you may be able to purchase, return, or renew the equipment at the end of the lease period.

Understanding the total cost, duration of the lease, and buyout terms will ensure your lease supports your business growth while keeping costs manageable.

Final Steps & Next Actions

• Evaluate your business needs – Determine if leasing aligns with your financial goals and equipment usage.
• Compare leasing providers – Research interest rates, lease terms, and end-of-lease options.
• Review the lease agreement carefully – Ensure you understand the monthly payments, tax benefits, and long-term costs.
• Plan for the end of the lease period – Decide whether to return, extend, or purchase the equipment when the lease ends.

Find the Right Lease with Excedr

By choosing the right equipment lease agreement, you can optimize your operations without overextending your budget. Excedr simplifies the leasing process by providing flexible leasing options tailored to your business needs—helping you access high-quality lab equipment while preserving cash flow.

Whether you need an operating lease or leaseback option, Excedr offers cost-effective solutions that help you avoid obsolescence, manage costs, and focus on innovation. Contact Excedr today to explore how our leasing program can support your lab’s success.