The type of equipment you want to lease, the term, and whether you want to keep the equipment at the end of the term will all be factors in choosing a lease. Lessees may lease one piece of equipment at a time or many items with a single lease. Companies that continually acquire equipment may use a master lease (see Master Lease in the glossary) to avoid executing a new contract every acquisition. Two common types of leases are operating leases and finance leases.
With an operating lease, the term is shorter than the expected useful life of the equipment. Rental payments do not cover the equipment cost for the lessor during the initial lease term. The operating lease will often contain a fair market value purchase option. This type of lease is popular for high-tech equipment because shorter term leases help equipment users stay ahead of equipment obsolescence. The lessor uses its equipment remarketing expertise to subsequently find other users for the returned equipment, something the typical equipment user does not have the time or ability to do. The drawback to the operating lease is that the monthly rental payment will usually be the highest of any other form of lease.
With a finance lease the term is longer, more nearly covering the useful life of the equipment. Rentals tend to be lower because of the longer term and less residual risk. From an accounting standpoint, an operating lease is the simplest type of lease for you to account for because you only expense rentals; there is no requirement to add the asset to the balance sheet, as long as the footnotes to the financial statements indicate the amount of your firm's lease rental obligations. Another lease product you may find beneficial is the sale-leaseback: You purchase the equipment you need and use it for a period of time before selling it to a lessor. After selling the equipment, you then lease the equipment. This is another way to free up your operating capital. On smaller equipment leases worth thousands of dollars, leases tend to be more standardized. Above that cost range - several hundred thousand into the millions—variations appear more frequently. A leveraged lease on a big ticket acquisition such as an airplane, may include several customized provisions and options that would not appear in a typical lease for a smaller amount. Therefore, flexibility is a product of the size of the lease.
A lease containing an option to purchase leased property at the end of the lease term at its then fair market value. The lessor does not have the ability to retain title to the equipment if the lessee chooses to exercise the purchase option.
A lease containing a provision allowing the lessee, at its option, to purchase the equipment for a price predetermined at lease inception, that is normally lower than the expected fair market value at the date the option can be exercised.