When your business needs expensive equipment but wants to avoid large upfront costs, leasing becomes a compelling option. But not all leases work the same way.
A capital lease—now referred to as a finance lease under modern accounting standards—is designed for companies that want long-term control and eventual ownership of an asset. It’s not just a rental. It’s a structured financing arrangement that gives the lessee (you) full use of the equipment, plus financial responsibility, for most of its useful life.
That makes capital leases a strong fit for businesses that plan to hold onto their equipment for the long haul—like manufacturers, logistics companies, or organizations with stable, predictable needs.
But if you’re running a lab, startup, or growing company in a fast-evolving industry like biotech or diagnostics, a capital lease might not offer the flexibility or speed you need.
In this guide, we’ll explain how capital leases work, when they make the most sense, how they compare to other financing options, and why many labs opt for operating leases instead. By the end, you’ll have a clearer view of whether this type of lease supports your strategy—or if a more flexible option is better suited to your goals.
What is a Capital Lease?
A capital lease—now called a finance lease under ASC 842—is a long-term lease where the lessee takes on the risks and rewards of owning a piece of equipment, even if the lessor retains legal title.
It’s not a short-term rental. This type of lease agreement is designed for businesses that need to use equipment for most of its useful life—and likely plan to own it in the end.
Here’s what that means in practice:
- The asset is capitalized: You list the equipment as a long-term asset on your balance sheet.
- A lease liability is created: You record the present value of the lease payments as a financial obligation.
- The lease payments are split: Part of each payment goes toward interest expense, the rest toward reducing the lease liability.
- The asset is depreciated: Just like if you had purchased it outright.
Most capital leases also include a purchase option—often at a bargain price—giving the lessee the ability to take ownership at the end of the lease term.
In short, capital leases make sense when:
- You want long-term access to a high-value asset
- You’re prepared to handle maintenance, insurance, and depreciation
- You want the asset on your financial statements as part of your long-term capital plan
If you’re thinking like an owner—but need the flexibility of leasing—this is the model that blurs the line between the two.
When Does a Capital Lease Make Sense?
A capital lease is best suited for businesses that see equipment as a long-term investment—not just a temporary tool.
Ask yourself:
- Will you use the asset for most of its useful life?
- Do you eventually want to own it?
- Are you prepared to take on maintenance and insurance responsibilities?
If the answer to all three is yes, a capital lease may be a better fit than an operating lease or short-term rental.
Here’s when it often makes sense:
- You’re investing in core infrastructure. Think bioreactors, CNC machines, or delivery vehicles—anything mission-critical that your team will rely on for years.
- You want the asset on your books. Recording the leased asset and lease liability on your balance sheet can help align with long-term planning, depreciation strategies, and stakeholder transparency.
- You have stable, predictable cash flow. Capital leases come with fixed monthly payments and fewer surprises, but less flexibility to walk away early.
- You’re planning for ownership. If you expect to use the asset well beyond the lease period, a bargain purchase option can make this path more economical than renting or returning.
Capital leases function more like ownership in disguise. For businesses with long-term horizons and tight asset strategies, that’s a feature—not a bug.
Capital Lease vs. Operating Lease: What’s the Difference?
While both capital leases (also called finance leases) and operating leases help businesses acquire equipment without a large upfront payment, the similarities end there.
A capital lease is structured for long-term use and control. You take on the risks and responsibilities of ownership—even if the lessor retains legal title during the lease. The asset appears on your balance sheet, you depreciate it, and you’re typically responsible for maintenance and insurance. Most capital leases also include a purchase option, making it easy to take ownership when the lease ends.
An operating lease, by contrast, is more like a rental. The lease term is shorter, the lessor retains ownership, and the asset doesn’t become a long-term fixture on your books. It’s designed for flexibility—return the equipment, renew the lease, or upgrade when your needs change.
The key difference? A capital lease is for when you’re thinking long-term and want the asset on your balance sheet. An operating lease is for when flexibility, lower risk, and short-term use are the priority.
Want a deeper breakdown? Read our full comparison of capital and operating leases.
Key Features & Responsibilities
Capital leases—also known as finance leases—are structured to function more like ownership than a rental. That means if you're the lessee, you’re taking on most of the financial and operational responsibilities that would typically come with buying the asset outright.
Here’s what that looks like in practice:
- Long-term use: Capital leases usually span the majority of an asset’s useful life. You're not just borrowing the equipment—you’re committing to it for the long haul.
- Asset and liability on the books: The leased asset is capitalized on your balance sheet, along with a lease liability representing the present value of your lease payments. This reflects your economic control of the equipment.
- Lease payments include interest: Each monthly payment is split between interest expense and principal reduction, similar to how a loan is treated. The interest portion is tax-deductible.
- You handle upkeep: Unlike an operating lease, where the lessor may cover service or repairs, capital leases shift maintenance, insurance, and any associated costs to the lessee. Think like an owner—you’re on the hook for keeping the asset in working order.
- Depreciation is your responsibility: Since the asset is considered yours for accounting purposes, it’s depreciated over its useful life. This can create tax benefits, depending on how your business handles depreciation.
- End-of-term ownership is likely: Most capital leases include a bargain purchase option, allowing you to buy the asset for a nominal amount once the lease term ends.
Bottom line? A capital lease gives you control and predictability—but with that comes more responsibility. If you’re ready to treat the equipment as your own from day one, this lease structure might make sense for your business.
Accounting & tax treatment of a capital lease
Under ASC 842 and IFRS 16, capital leases (now referred to as finance leases) are treated as if the lessee owns the asset. That means the equipment shows up on your financial statements from the start of the lease term.
Here’s what that looks like in practice:
- The asset is capitalized: You record the leased equipment on your balance sheet as a right-of-use (ROU) asset, using either the fair market value or the present value of lease payments—whichever is lower.
- A lease liability is recorded: You also list the total present value of the lease payments as a liability, reflecting your future financial obligation to the lessor.
- Payments are split: Each lease payment is divided into two parts:
- Interest expense: Deductible on your income statement.
- Principal reduction: Lowers the lease liability on your balance sheet.
- Depreciation applies: Since the asset is capitalized, you depreciate it over its useful life—typically the same period as the lease term.
Let’s look at a simplified example:
Suppose you lease a piece of equipment valued at $100,000 for five years, with fixed annual payments of $25,000. Using a 10% discount rate, the present value of the payments is approximately $95,000.
- On your balance sheet, you’d record:
- A right-of-use asset of $95,000
- A lease liability of $95,000
- On your income statement each year, you’d recognize:
- Interest expense (which decreases over time)
- Depreciation (typically straight-line over five years)
Together, these entries give stakeholders a clear view of your capital commitments—while providing you with potential tax advantages. You may deduct both interest and depreciation, depending on your financial setup and local regulations.
Capital lease vs. loan: Which one makes more sense?
When acquiring equipment, many businesses compare capital leases to traditional loans. Both provide long-term access to high-value assets—but they differ in structure, flexibility, and financial impact.
Ownership
- Capital lease: You don’t own the asset during the lease term, but you typically gain ownership at the end—often through a bargain purchase option.
- Loan: You own the asset from day one and pay back the lender over time.
Balance sheet treatment
- Both are capitalized: You record the asset and a corresponding liability.
- But with a loan, the liability is a loan payable. With a capital lease, it's a lease liability tied to a lease agreement.
Payments & tax treatment
- Capital lease: Payments are split into interest and principal. Interest is tax-deductible, and the asset can be depreciated.
- Loan: Same treatment—interest is deductible, and you can depreciate the asset.
Flexibility
- Capital lease: May offer end-of-term options (buyout, upgrade, return), depending on the lease terms.
- Loan: No flexibility—once the loan is paid off, you own the asset outright, for better or worse.
When to choose each option
- Choose a capital lease if you want predictable payments, an easier approval process, and flexibility at the end of the term.
- Choose a loan if you want immediate ownership, can cover a larger upfront cost, and are confident the equipment will retain value.
Ultimately, the right choice depends on your cash flow, equipment goals, and how you prefer to structure your liabilities.
Pros and cons of a capital lease: A quick recap
A capital lease can be a strategic way to acquire essential business equipment—but it’s not right for everyone. Here’s a concise breakdown:
Advantages
- Asset control: You get long-term use and often eventual ownership.
- Tax benefits: You can deduct interest expense and depreciate the asset.
- Predictable costs: Fixed monthly payments help with budgeting.
- Balance sheet visibility: Helps clarify your asset base for lenders or investors.
Disadvantages
- Long-term commitment: You're locked into the full lease term.
- Upkeep responsibilities: You handle maintenance, insurance, and repairs.
- Obsolescence risk: You could be stuck with outdated equipment.
- Less flexibility: Compared to an operating lease, exit options are limited.
A capital lease works best when your goal is long-term asset control—and you're prepared to take on the responsibilities that come with it.
Capital leases: A good fit—but not for everyone
Capital leases (or finance leases under ASC 842) are built for business owners who think like owners. You gain long-term control over the equipment, record it on your balance sheet, and usually have the option to purchase it when the lease ends. That makes capital leases a smart move if you need high-value assets for the long haul and want to spread out the cost over time.
But they’re not always the right tool—especially in industries where technology evolves quickly or budgets require more flexibility. If your equipment needs change often, or you’re looking to stay lean and adaptable, an operating lease might be the better fit.
At Excedr, we specialize in operating leases because they provide life sciences and lab-based companies with access to advanced equipment, without the long-term burdens of ownership. You get lower upfront costs, tax-deductible lease payments, full maintenance coverage, and flexibility to scale as your research evolves.
Not sure which path makes sense for your business? Explore our guide on capital leases vs. operating leases or get in touch with our team to find the best fit for your goals.