Leasing companies, as well as banks and some suppliers and vendors, will rent equipment and other business assets to small businesses. Some manufacturers have leasing agents who may be able to arrange lease terms or a credit arrangement with the manufacturer, a subsidiary company, or a specific lessor.

Leasing assets, rather than purchasing them, is a form of financing because it avoids the large downpayment frequently required for asset purchases and it frees up funds for other business expenditures. However, you should be aware that leasing from conventional lenders may be difficult for startup businesses because traditional lenders require an operating history from prospective lessees. Among the advantages of leasing are:

There are also a number of disadvantages of leasing.

Because more businesses are using leases, greater creativity in lease terms and purposes are becoming available. Leases can be drafted so that they resemble a long-term purchase of capital equipment. The term of the lease approximates the expected useful life of the asset and the total of lease payments is keyed to the underlying cost of the asset. The lessee pays insurance and taxes on the asset. The lessee may either be required to purchase the asset at the end of the lease, or a purchase option may be available at the end of the lease or for a stated price during the term of the lease. A service contract can usually be purchased for an additional charge.


As your ownership options/rights are increased in a lease agreement, your financial statements may have to show the lease as an asset purchase, with an accompanying listing of the asset and a liability for the amount of the "loan." These changes will negatively affect your debt/equity ratios and your net income.

Sale and leaseback. A derivative form of lease financing, this type of arrangement requires the borrower to sell valuable, fixed assets, such as equipment or facilities, to a financier who then leases the asset back to the seller. The sale generates cash to the small business for short-term needs, allows continued use of the asset, and creates a tax deduction for rental expense. A purchase option at the end of the lease period allows the original owner to reacquire title to the asset at a later date.