Leasing commercial equipment to pay for energy upgrades for your business or nonprofit
In this blog series, we’re giving an overview of different ways you or your clients can pay for energy efficient upgrades to businesses, nonprofits, or governmental entities. So far we’ve covered using the operating budget and commercial loans. This article is an overview of using commercial leasing to finance energy projects.
Commercial Equipment Leases are a common mechanism for financing energy efficiency projects like lighting upgrades. In commercial leasing, the customer arranges lease financing through the manufacturer, vendor, or installer (or a third party lessor), which allows that customer to use energy efficiency equipment without purchasing it outright.
While commercial leasing is likely familiar to most business operators, the intricacies of the equipment ownership and how leases impact the balance sheet may be less familiar.
There are two common types of commercial equipment leases that can be used to finance energy efficiency projects: operating leases and capital leases. It is important to know the differences between the two so you can best decide which type is best for your company:
The lessee, or company using the energy efficiency equipment, does not own the equipment during the lease term. Since the lessee does not own the equipment, it is does not add value to the company’s balance sheet as an asset. Also, the lease will not show up on the balance sheet as a liability. Fair market value is often determined at the beginning of the lease term so the lessee can purchase the equipment at the end of the lease term. New accounting policies effective in 2019 will force companies to recognize operating leases on their balance sheets.
Capital Leases are often used when the value of the leased equipment depreciates almost completely during the lease term. The equipment is owned by the lessor throughout the lease period, but in this instance, the lease does impact the balance sheet of the lessee because the purchase of the equipment is included in the lease terms. Capital leases allow the lessee to depreciate the equipment since it is held as a leased asset. The capital lease is also a liability on the balance sheet, and the capital lease often requires the lessee to insure and maintain equipment.
While the cost of a lease will be higher than using debt to finance the energy efficiency equipment, there are reasons an organization might prefer a lease.
There will often be less paperwork involved with leasing compared to getting a commercial loan, and the owner will likely not be required to provide a personal guaranty on the lease. Organizations with a sensitivity to take on debt liabilities will find an operating lease preferable because it does not impact the balance sheet. Also, operating leases can sometimes be approved by lower tier managers of companies than debt, which means it is much easier to get a project done in large corporations.
There are benefits to leasing equipment for energy efficient upgrades, but each company must weigh the benefits to the additional costs when determining which financing mechanism is best.
Special thanks to David Clamage from Saulsbury Hill Financial for your input on commercial leasing for this blog post.Click here for more information from the Department of Energy on Lease Funding.
If you have a client who should look into getting a 2% loan for an energy efficiency project from Pathway Lending, let’s get started.
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