Understanding key equipment leasing terms can save you from unexpected costs, confusing contracts, and costly mistakes. Whether you're signing your first lease or renegotiating with a vendor, knowing the terminology empowers you to make smarter decisions for your business.
Here’s a list of the most common terms you’ll encounter in the equipment leasing process—and what each one means in plain English.
What are common equipment leasing terms?
Key terms include capital lease, operating lease, fair market value, buyout option, lease term, residual value, and factor rate.
Also called a finance lease, this structure acts more like a loan. You make fixed payments and usually gain ownership at the end. It appears on your balance sheet as both an asset and a liability.
Best for: Long-term equipment you plan to keep.
This short-term lease is often used for assets that quickly become outdated (like tech). You don’t own the equipment, and payments are treated as business expenses.
Best for: Temporary use or frequently upgraded gear.
A common end-of-lease buyout option. FMV is the estimated resale price of the equipment at the end of the lease term. If you want to own the equipment, you’ll pay this amount to purchase it.
Pro tip: Ask for an FMV estimate in writing before signing.
This is a capital lease structure where you purchase the equipment for just $1 at the end of the term. Monthly payments are usually higher than FMV leases but you gain full ownership.
Best for: Businesses that want to own the equipment no matter what.
This refers to the length of the lease agreement, typically ranging from 12 to 60 months. Shorter terms mean higher monthly payments, but long-term leases may lock you into gear longer than needed.
The estimated value of the equipment at the end of the lease. It helps determine your monthly payments—lower residual values mean higher payments.
Instead of using an APR, some leasing companies use a factor rate to express cost. For example, a factor rate of 1.2 on a $10,000 lease means you’ll repay $12,000 total. Always convert this to APR for comparison.
That’s you—the business owner leasing the equipment.
This is the leasing company or provider that owns the equipment and leases it to your business.
A penalty for ending your lease before the agreed term. These can be steep, so make sure you understand the policy before signing.
At the end of a lease, you’ll typically choose to:
Return the equipment
Renew the lease
Buy the equipment (via FMV or $1 buyout)
Ask for all options to be spelled out clearly in your agreement.
These are non-tangible expenses like delivery, installation, or training. Some leasing companies allow these to be bundled into the lease.
A tax deduction that lets you write off the full cost of financed or leased equipment in the year it’s placed into service.
Learn more from the IRS Section 179 resource (opens in new tab)
Before signing any equipment lease:
Request a sample agreement to review terms in advance
Ask questions about unclear terms or hidden fees
Compare multiple providers and negotiate where possible
Consult a financial advisor or legal expert if unsure
Understanding these common equipment leasing terms can make the difference between a smart deal and a costly mistake. With this glossary in hand, you’ll be able to navigate contracts, negotiate better terms, and choose leases that align with your business goals.
Feeling more confident in your leasing knowledge?
Start comparing offers, ask the right questions, and lease equipment with clarity and confidence.
Don’t just sign—understand.