The equipment lease agreement is collective bargaining where the lessor (owner) of the equipment, allows the lessee (investor) to make use of the equipment for a defined period in exchange for regular payments.
The subject of the lease may be cars, plant machines, etc. Once the lessor (owner) and lessee (investor) agree on the terms and conditions of the lease, the lessee (investor) gets the right to use the equipment and, in return, makes regular payments during the stipulated agreed time of the lease. However, the lessor (owner) retains ownership of the equipment and has the right to bring an end to the equipment lease agreement if the lessee (investor) breaches the terms and conditions of the agreement or engages in an illegal act using the equipment.
Types of Equipment Lease
An equipment lease is categorically grouped into 2, which are: Capital Lease and Operating Lease
· Capital Lease
A capital lease is generally long-term and unchangeable and is used to lease equipment that the company wants to use in the long term or purchase at the end of the lease period. In a capital lease, the lessee is responsible for maintaining the asset and paying any insurance and levies connected with the lease. Businesses prefer this type of lease when renting precious capital equipment they may not have the finances to buy instantly.
· Operating Lease
An operating lease is generally short-term and changeable before the end of the equipment lease period. It’s common for businesses that want to use the equipment for a short period or replace the equipment at the end of the lease.
The lessor (owner) retains the ownership of the equipment and bears the threat of fustiness.
The lessee can cancel the equipment lease agreement, with previous notice, at any time before the end of the lease period, but generally with a penalty.
Other types of equipment lease combine both features of capital and operating lease to meet the requirements of both parties (lessor and lessee) called Leveraged lease.
Leveraged leases let the lessee (investor) finance the lease cost by issuing debt and equity against the equipment lease payments.
Components of an Equipment Lease Agreement
An equipment lease agreement comprises certain terms that form the base of the contract. Some of these terms may include:
· Lease duration: The lease duration will depend on the company’s requirements and the cost of the equipment. For a small business whose equipment needs may change snappily, a short lease duration is a favorable option. For expensive capital equipment, a longer parcel duration is more accessible and cheaper in the long term.
· Fiscal terms: The equipment lease agreement includes terms similar to the timelines on payments – for example, when the periodic payments are due and the last due date for late payments.
· Payment due to the letter: A business considers its projected cash overflows to decide if it can meet the periodic interest and top payments. The payments are spread over several months until the end of the lease period or when the lessee takes the power of the equipment if there’s a living agreement with the lessor.
· Request value of equipment: Some equipment is expensive, and the lessee needs to understand the request value of the equipment before getting into the contract. Knowing the request value helps the lessee assess the insurance costs to cover against the outfit being lost or damaged.