Operating Lease Agreement for Equipment
An operating lease agreement for equipment is used when leasing equipment such as leasing a new technology for your business if you can't purchase it outright.3 min read
An operating lease agreement for equipment is used when leasing equipment. For example, if you need new technology for your business and can't afford to purchase it outright, you could lease it. A lease breaks the cost into smaller payments each month, usually over a period of a few years. When the lease ends, options are to buy the technology or equipment at its depreciated value or return it.
Other Names for an Operating Lease Agreement for Equipment
There are several other names for an operating lease agreement for equipment. This type of lease document can also be called:
- An equipment rental agreement
- An equipment loan letter
- An equipment rental contract
- An equipment lease agreement
The Purpose of an Equipment Lease Agreement
Equipment lease agreements are used to track and record items that one party owns and another party rents. The agreement is a legally binding contract between the lessor who owns the equipment and the lessee who uses the equipment. The contractual agreement specifies how long the lessee gets to use the equipment and the payment amount. The type of things covered under the lease agreement can be machines for a factory, vehicles, and any other type of equipment.
When you're considering leasing equipment, look at the lessor almost as carefully as if you were choosing a business partner. They will most likely also be looking at you this closely. In a sense, the lessor does become a business partner for you, so you should choose one who's willing to work with you.
Things to consider and examine are their background, their experience in the field related to your line of business, and even the references they have from previous customers. A good relationship with the lessor can benefit you because the lessor does have the option to waive some fees that are typically the lessee's responsibility, for example, late fees and application fees can be waived by the lessor.
Research Before Leasing
Before agreeing to an equipment lease, both parties should do a little research on the other. Some things to consider are the other company's payment history, their credit history, how their corporate relationships are, their financial standing, and any public filings against them. Things like litigation that's pending can be found through public record searches. For the lessee, it's also important to know how easy or complicated the payment system is, for example, consider how much paperwork will be involved in leasing the equipment.
Ownership of the Property
After the parties reach an agreement on the lease terms, the lessee gets to use the equipment immediately, and the lessor receives payments as promised. The lessor holds onto ownership of the equipment, even though it's in the lessee's possession. The owner maintains the right to cancel the lease if the lessee fails to meet the terms they have agreed to or if it's found out that the equipment has been used for any kind of illegal activity.
Two Types of Equipment Leases
Equipment lease types fall into two categories. First, there are capital leases, and then there are operating leases.
- Capital leases are long-term ones that can't be canceled. These are used for companies that need long-term access to equipment with an option to purchase at the end of the term. Lessors are responsible for taking care of the insurance and maintaining the leased property. The lessee also tracks the equipment as an asset and its liabilities, like depreciation, during the course of the lease. Large companies use capital leases as a way to claim both the expense of paying interest and the depreciation on the equipment.
- Operating leases are shorter in term than capital leases, and it's possible to cancel an operating lease early. Business's that only need the equipment for a short time use operating leases. The party leasing the equipment through an operating lease maintains ownership and has the option to recover money by selling it at the end of the lease period. That can also be a disadvantage, though, if the equipment becomes obsolete when new technology is released. Lessees can't claim depreciation on equipment obtained through an operating lease.
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