Finance or operating lease? Deciphering the legalese of equipment finance

April 01, 2021

What type of lease makes the most sense for financing equipment? Learn the legal language behind each major financing path.

You decided to lease equipment – great!

Now it’s time to sift through the common terms on lease agreements, and figure out which type of lease is best for your business. Here’s a quick primer on the types of equipment leases, and how they’re commonly used:

Finance leases

Finance leases meet one or more of the following criteria and are classified as purchases by the lessee:

The lease term is greater than 75 percent of the property’s estimated economic life.
The lease contains an option to purchase the property for less than fair market value.
Ownership of the property is transferred to the lessee at the end of the lease term.
The present value of the lease payments exceeds 90 percent of the fair market value of the property.

Riley Thompson, vice president of Equipment Finance at U.S. Bank, notes that the accounting process has “changed significantly in the past 10-15 years, due to technological and security advancements.” The advent of cloud computing is a recent example, as cloud companies take advantage of newer accounting processes that separate the cloud service itself from any necessary on-premises equipment.

Note: This type of lease was also called a “Capital Lease” in the past. Under ASC-842 rule changes, the term “Capital Lease” is no longer used in the GAAP accounting classifications.

Operating leases

Operating leases are any leases that are not finance leases. Organizations generally use them for short-term equipment leasing. The lessee can acquire the use of equipment for just a fraction of the useful life of the asset, and the lessor may provide additional services such as maintenance and insurance.

Why would I choose an operating lease?	What do I need to know before signing an operating lease?
If you do not want to own your equipment, or are simply looking for a short-term “right-to-use” agreement, then an operating lease might make more sense. Since you don’t assume ownership of the financed equipment, you aren’t liable for maintenance or insurance costs.	Since you don’t own the equipment, you wouldn’t get any benefits from asset ownership, including tax depreciation.
Operating leases allow for more flexibility in upgrading or replacing equipment, especially to keep pace with a 3-5 year lifespan.	While you can’t purchase the equipment outright during an operating lease, some lessors might offer a purchase option at the end of the lease.
Operating lease accounting processes may be simpler, since lease payments are considered operating expenses.	On a lease renewal, the payments should be lower than the initial payments – and when you enter into an operating lease, your company should always have the option of returning the equipment.

Why would I choose an operating lease?

What do I need to know before signing an operating lease?

If you do not want to own your equipment, or are simply looking for a short-term “right-to-use” agreement, then an operating lease might make more sense. Since you don’t assume ownership of the financed equipment, you aren’t liable for maintenance or insurance costs.

Since you don’t own the equipment, you wouldn’t get any benefits from asset ownership, including tax depreciation.

Operating leases allow for more flexibility in upgrading or replacing equipment, especially to keep pace with a 3-5 year lifespan.

While you can’t purchase the equipment outright during an operating lease, some lessors might offer a purchase option at the end of the lease.

Operating lease accounting processes may be simpler, since lease payments are considered operating expenses.

On a lease renewal, the payments should be lower than the initial payments – and when you enter into an operating lease, your company should always have the option of returning the equipment.

Thompson notes that changes in the accounting process aren’t reflected in most operating leases, since they are still primarily about “managing cash flow and obsolescence.”

As you determine how to refresh your equipment, choosing the right type of lease is vital to achieving your short-term and long-term business goals. Wherever you are in the discussion, we’re here to help you get the most effective technology solution.

Contact a U.S. Bank Equipment Finance specialist for more information.

Learn about U.S. Bank

Visit usbank.com

Request a call

What you need to know about renting

What financial advice would you give your younger self?

Travel for less: Smart (not cheap) ways to spend less on your next trip

How to manage your money when you're self-employed

Is a Health Savings Account missing from your retirement plan?

7 things to know about long-term care insurance

What is Medicare? Understanding your coverage options

Using 529 plans for K-12 tuition

How to open and invest in a 529 plan

How grandparents can contribute to college funds instead of buying gifts

7 financial questions to consider when changing jobs

Retirement planning in the gig economy

Key milestone ages as you near and start retirement

Retirement planning strategies for dual-income families

LGBTQ+ retirement planning: What you need to know

Leveraging the ASC-842 rule changes in equipment lease accounting

Automate escheatment for accounts payable to save time and money

How entrepreneurs can plan for what matters most

Annual insurance review checklist

What you need to know before buying a new or used car

Do I need a financial advisor?

Retirement income planning: 4 steps to take

How to protect your digital assets in your estate plan

Webinar: Mindset Matters: How to practice mindful spending

3 awkward situations Zelle can help avoid

Car shopping: Buying versus leasing your next vehicle

Dear Money Mentor: When should I refinance a mortgage?

Should you buy a house that’s still under construction?

Tips for navigating a medical hardship when you’re unable to work

What’s in your emergency fund?

How I did it: Turned my side hustle into a full-time job

Adulting 101: How to make a budget plan

Resources for managing financial matters after an unexpected death

Banking connectivity: Helping businesses deliver the easier, faster, more secure customer experience of the future

Don’t underestimate the importance of balancing your checking account

4 tips to help you save for retirement in your 20s

The cyber insurance question: Additional protection beyond prevention

Money Moments: How to manage your finances after a divorce

Digital Onboarding helps finance firm’s clients build communities

Talent acquisition 101: Building a small business dream team

Can fantasy football make you a better investor?

Money Moments: 8 dos and don’ts for saving money in your 30s

5 unexpected retirement expenses

How to retire happy

Do your investments match your financial goals?

Working after retirement: Factors to consider

6 pandemic money habits to keep for the long term

Year-end financial checklist

LGBTQ+ financial planning: 7 reasons why it matters

4 steps to finding a charity to support

How to discuss money with your family

7 ways for pre-retirees to get ready for retirement

Insource or outsource? 10 considerations

From LLC to S-corp: Choosing a small business entity

What you should know about buying a car

Your financial aid guide: What are your options?

How to get started creating your business plan

How having savings gives you peace of mind

Unexpected cost savings may be hiding in your payment strategy

Treasury management innovations earn Model Bank awards

8 steps to choosing a health insurance plan

What to do when you lose your job

Make your business legit

4 reasons estate planning is important

Reviewing your beneficiaries: A 5-step guide

Dear Money Mentor: How do I set and track financial goals?

I own two electric vehicles. Here’s what I’ve learned about buying and driving EVs.

9 simple ways to save

5 things to avoid that can devalue your home

3 types of insurance you shouldn’t ignore

5 financial goals for the new year

Estate planning documents: Living trusts vs. will vs. living will

How to track your spending patterns

How to manage your money: 6 steps to take

6 tips on trust fund distributions to beneficiaries

A beginner's guide to investing

Good debt vs. bad debt: Know the difference

Investment strategies by age

Addressing financial uncertainty in international business

Want AP automation to pay both businesses and consumers?

Enhancing the patient experience through people-centered payments

Automate accounts payable to optimize revenue and payments

Colleges respond to student needs by offering digital payments

Military homeownership: Your guide to resources, financing and more

30-day adulting challenge: Financial wellness tasks to complete in a month

The connection between your health and financial well-being

What government officials should know about real-time payments

Time is money: Intelligent Payment Routing saves businesses both

4 ways to make practical use of real-time payments

Friction: How it can help achieve money goals

Your guide to breaking the rental cycle

4 ways to free up your budget (and your life) with a smaller home

First-time homebuyer’s guide to getting a mortgage

How to build wealth at any age

Money management guide to financial independence

Drive digital transformation with payments innovation

Tailor Ridge eBill case study

Buying or leasing? Questions to ask before signing a contract

Home buying myths: Realities of owning a home

What military service taught me about money management

5 steps to take before transitioning your business

7 year-end tax planning tips

Should I itemize my taxes?

Tips for working in the gig economy

Is it time to get a shared bank account with your partner?

Financial gifts can be a valuable – and fun – choice for the holidays

What corporate treasurers need to know about Virtual Account Management

Your 4-step guide to financial planning

U.S. Bank asks: Transitioning out of college life? What’s next?

3 emerging technology trends for bankers

For today's homebuyers, time and money are everything

Here’s how to create a budget for yourself

Understanding guardianship and power of attorney in banking

How to use debt to build wealth

How to winterize your vehicle

Take the stress out of buying your teen a car

Financial steps to take after the death of a spouse

Zelle® helps Sunriver Resort make payments efficient and secure

Small business growth: 6 strategies for scaling your business

Unexpected expenses: 5 small business costs to know and how to finance them

Streamline operations with all-in-one small business financial support

Healthcare marketing: How to promote your medical practice

Why ecommerce for small business strategy is integral

How blockchain technology is changing treasury

Blockchain: Separating hype from substance

Personal loans first-timer's guide: 7 questions to ask

How I did it: Bought a home without a 20 percent down payment

House Hacks: How buying an investment property worked as my first home

Multiple accounts can make it easier to follow a monthly budget

How I did it: Learned to budget as a single mom

How to stop living paycheck to paycheck post-pay increase

Money Moments: Tips for selling your home

Parent checklist: Preparing for college

Which is better: Combining bank accounts before marriage — or after?

Do you and your fiancé have compatible financial goals?

How to establish your business credit score

Checklist: 10 questions to ask your home inspector

5 reasons why couples may have separate bank accounts

7 steps: How couples and single parents can prepare for child care costs

How can I help my student manage money?

How to save for a wedding

How to save money while helping the environment

It's possible: 7 tips for breaking the spending cycle

Money Moments: 3 smart financial strategies when caring for aging parents

Personal finance for teens can empower your child

Tips to overcome three common savings hurdles

Webinar: Uncover the cost: Wedding

Webinar: Uncover the cost: International trip

U.S. Bank asks: Do you know your finances?

P2P payments make it easier to split the tab

Webinar: Uncover the cost: Building a home

10 questions to ask when hiring a contractor

10 ways to increase your home’s curb appeal

Webinar: Uncover the cost: Home renovation

Beyond the mortgage: Other costs for homeowners

11 essential things to do before baby comes

How to plan and save for adoption and in vitro fertility treatment costs

Closing on a house checklist for buyers

What you need to know as the executor of an estate

What documents do you need after a loved one dies?

How to prepare for a natural disaster

Student checklist: Preparing for college

Webinar: Uncover the cost: College diploma

How I did it: Paid off student loans

Webinar: Bank Notes: College cost comparison

7 steps to keep your personal and business finances separate

How to apply for federal student aid through the FAFSA

Be careful when taking out student loans

ABL mythbusters: The truth about asset-based lending

Crypto + Homebuying: Impacts on the real estate market

Integrated receivables management solution supports customer focus at MSC Industrial Supply

ABCs of APIs: Drive treasury efficiency with real-time connectivity

Webinar: ESG for Corporations: Building an all-weather, long-lasting strategy

How emerging banking solutions enable better decisions

Empowering managers with data automation and integration

Common pitfalls to avoid in the equipment financing process

The secret to successful service provider integration

How running a business that aligns with core values is paying off

Meet the Milwaukee businessman behind Funky Fresh Spring Rolls

Questions to ask before buying a car

How to choose the best car loan for you

How electronic billing platforms improve government payments

7 tips to help grow your business after launch

How to test new business ideas

Costs to consider when starting a business

How to redefine challenges with business collaboration

How to sell your business without emotions getting in the way

10 tips on how to run a successful family business

The costs of hiring a new employee

How to expand your business: Does a new location make sense?

How to build a content team

Investing in capital expenditures: What to discuss with key partners

3 ways to gain loyalty with your customers

Finance or operating lease? Deciphering the legalese of equipment finance

Digital trends poised to reshape hotel payments

Safeguarding the payment experience through contactless

How AI in treasury management is transforming finance

ABCs of ARP: Answers to American Rescue Plan questions for counties

The AI journey in finance: How to make it part of your strategy

COVID-19 safety recommendations: Are you ready to reopen?

Equal Housing Lender

Loan approval is subject to credit approval and program guidelines. Not all loan programs are available in all states for all loan amounts. Interest rate and program terms are subject to change without notice. Mortgage, home equity and credit products are offered by U.S. Bank National Association. Deposit products are offered by U.S. Bank National Association. Member FDIC.