Equipment leasing: principles and operation

Equipment leasing is a rental agreement for equipment, with an option to purchase at the end of the term. A specialized company buys the equipment from the supplier and leases it to the business for a fixed term, typically 3 to 7 years. At the end of the term, the business returns the equipment, renews the contract, or purchases the asset at a price that takes into account the lease payments already made.

This page describes the mechanism. It does not provide any rent or interest rate information, does not compare the cost of a lease and a loan, and does not address real estate leasing or early termination. Financing is arranged through our banking partners.

How it works

1. The company usually chooses its equipment from a supplier (Bank of France).
2. The leasing company, called the lessor, buys the asset directly from the supplier.
3. It leases the equipment to the company, the lessee, for a fixed term. The leasing company retains ownership of the equipment (Bpifrance Création).
4. The company pays rent during the contract.
5. At the deadline, she chooses between three outcomes (see below).

The lessee is a company, regardless of its legal status, after its application has been accepted by the lessor. The lessor is a specialized company, generally a subsidiary of a bank or construction company, according to Bpifrance Création.

The Bank of France describes the contract as a fixed-term, irrevocable lease. The contract includes a unilateral promise to sell, meaning the option to purchase the company at the end of the term.

Duration and rent

The Bank of France states that leasing allows "total financing of an investment, whereas bank loans may require an initial down payment." This page does not specify any rental payments.

The end of the contract

At the end of the term, the company has three options:

• return the equipment ;
• renew the contract ;
• buy the equipment by exercising the purchase option.

In the event of a purchase, the price takes into account the rent already paid: Bpifrance Création refers to this as the residual value. The amount of the residual value is fixed by the contract: this page does not provide any information.

What equipment?

Bpifrance Création cites vehicles, IT equipment, office equipment, machine tools, etc. The Banque de France refers to capital goods, equipment, and tools. Bpifrance Création adds that specific equipment presents a risk of non-resale for the lessor.

Accounting and taxation: what the sources say

Accounting. Bpifrance Création states that, legally, a finance lease is a rental agreement: the equipment is therefore not listed as an asset on the balance sheet. Lease payments are recorded in the income statement, the outstanding balance of the contracts is detailed in the financial statements, and the contracts must be registered with the commercial court registry. The Bank of France clarifies that a finance lease, legally classified as a lease with an option to purchase, is a financial transaction and is considered a credit transaction. The accounting treatment of a contract should be verified with your accountant.

Rents. Bpifrance Création states that rent payments are deductible expenses from a company's taxable profit, provided the required conditions are met. The Banque de France states that, for the duration of the lease, companies can deduct the full amount of rent payments for tax purposes, and that this period is generally much shorter than the tax depreciation period for the asset when the company owns it. This page does not quantify any tax savings: they depend on your company, your financial results, and the deduction conditions.

VAT. Bpifrance Création indicates that leasing avoids a significant gap between VAT paid and VAT collected.

The limits

• The cost. Bpifrance Création writes that it can be higher than that of a traditional bank loan.
• The choice of equipment. According to Bpifrance Création, specific equipment presents a risk of non-resale for the lessor.
• Commitment. The contract is concluded for a fixed and irrevocable period, according to the Bank of France.
• The lessor's agreement. The application must be accepted.

Bpifrance Création also mentions that sometimes the supplier agrees to sign a "commitment to take back the equipment" in the event of default by the tenant company.

Finance lease or operating lease

The Bank of France defines financial leasing (or long-term leasing) as a lease without a purchase option. It is the absence of a purchase option that distinguishes it from finance leasing.

Equipment leasing: a numerical example (fictitious profile)

Situation. A fictional craftsman sets up his company and needs to purchase a €40,000 machine. He is hesitating between a loan and a 5-year lease.

Issue. How much money does he need to pay upfront, and how many months' rent will he pay?

Strategy. We take two facts from the sources: for a creation loan, Bpifrance Création indicates a contribution usually requested of around 30 % of the need; for the leasing, no contribution from the creator is required, apart from a security deposit and possible advance rent, not quantified here.

Result. With a loan, the down payment would be approximately €40,000 × 30 % = €12,000. With leasing, no initial investment from the business owner is required. Over 5 years, the number of lease payments is 60 if they are monthly, 20 if they are quarterly and 10 if they are semi-annual.

This example does not compare costs: leasing can be more expensive than a loan, and the page does not specify any rent payments. The 30 % down payment is an order of magnitude for business creation, not a rule. The profile is fictitious.

Equipment leasing: what changes depending on your situation

• The equipment : standard or specific.
• The duration of the contract and the frequency of rent payments.
• Your cash flow : security deposit, advance rent, seasonality.
• Your accounting and tax treatment, to be verified with your accountant.
• Your growth project or of recovery, if the equipment is financed with other loans.

The rule depends on your situation. No results are guaranteed.