Paying for it: 4 ways to reduce equipment lease expenditures

From the November 2025 edition of Supply Chain Management Review.

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In 2024, more than half (54%) of corporate equipment acquisitions were financed. Eight out of 10 businesses use leases to acquire the equipment they need to run their operations (production, material handling, computer hardware, office, fleet vehicles, etc.). That’s right, leases are the most common method used today for companies to procure CapEx equipment. With inflation rates declining dramatically from 7% (2021) to 2.4% (mid 2025), interest rates are also declining. Moreover, there is significant margin compression from independent lessors competing with the banks…all making leases even more beneficial for smart companies.

Important fact: Lessors aren’t losing money when they finance your equipment needs. The equipment financing industry is a $1.34 trillion marketplace for a reason. It is highly profitable for financiers who are receiving ROI at every step of the leasing lifecycle. Experts only see this trend escalating in the future. According to The Equipment Leasing & Finance Foundation, this marketplace will reach $3.1 trillion by 2032, with North America being the largest region in the equipment finance service market.

This article will discuss the benefits and risks in leasing. It will also describe four methods for readers to reduce costs throughout the process of lease generation and lifecycle management.

Benefits of leasing

Properly executed, leasing is the cheapest, most cost-effective method of acquiring most assets. So what are the advantages to leasing equipment rather than buying (even with a loan)? There are many that justify this practice for most companies. Leasing benefits include the following.

• Lower upfront costs. Leasing typically requires less initial capital than buying, as down payments are often smaller (or not required). This preserves cash flow for other business needs.
• Predictable monthly payments. Lease payments are usually fixed, making it easier for businesses to budget and manage their expenses.
• Tax deductions. Lease payments are often fully tax-deductible as operating expenses, potentially reducing a firm’s taxable income.
• Access to new technology. Leasing allows companies to regularly upgrade to newer, more advanced equipment without the burden of selling older assets. This is especially beneficial in industries with rapid technological advancements.
• Potential off-balance sheet financing. Some types of leases, specifically operating leases, may not appear as a liability on the balance sheet, which can improve financial ratios (Sarbanes Oaxley requirements may require reporting of certain lease obligations).
• Lower risk of obsolescence. Leasing shifts the burden of obsolescence to the lessor, as companies can upgrade equipment at the end of the lease term for newer, more efficient, and lower total cost of ownership (TCO) assets.
• Simplified tax reporting. For operating leases, businesses avoid the complexities of calculating depreciation and maintaining detailed asset records for tax purpose
• Optimization of balance sheet. In addition to the above, leasing (compared with borrowing to buy) helps companies optimize their balance sheets in four important ways.

1. A capitalized lease obligation is not classified as debt, so a company’s debt limits in covenants and debt ratios appear better.
2. The “on balance sheet” capitalized value of the leased asset is less than 90% of the cost of the leased asset, so both return on asset (ROA) and return on invested capital (ROIC) measures are better.
3. The P&L cost of the lease is the straight-lined average rent expense versus the front-loaded interest of a loan (and related straight-line depreciation) so earnings per share (EPS) is better.
4. The benefits in both balance sheet and P&L statements are permanent if a company, as an ongoing policy, continues to lease all assets (year after year).

So what could go wrong? Well, unless you have extensive expertise in negotiating lease contracts, the financier will often stack the deck in their favor with creative terms and conditions in their lease agreements and related documents.

Games financiers play: Risks in leasing

Leasing companies are very good at their game. They have spent over 100 years developing creative ways to optimize their yield in their contracts. They use sophisticated methods to be the winner; no matter what changes occur during the life of the lease. Miss a payment in an onerous lease, and “hair trigger” default clauses create overdue payments that far exceed usury interest rates and may also trigger other penalties, leading to even more yields/profits for the lessor. A clause may activate causing you to lose beneficial rates or be exposed to penalties (or even loss of the leased assets). Accidentally allowing an “on time” end-of-lease notification can trigger a lengthy, unplanned lease extension that creates cash flow issues for your company’s business units. Countless other tricks are embedded into the approach of many lessors.

Types of leases used by companies

Two primary types of leases, as governed by Generally Accepted Accounting Principles (GAAP), are used for equipment leased in the United States: Operating and finance (or capital) leases. In many other countries, generally similar lease types are defined via International Financial Reporting Standard (IFRS). While whole articles could be written about these two types of leases, key differences are shown in Table 1.

 

Opportunities to save money in leasing

Can company leaders really improve profitability by reducing equipment leasing expenses? Absolutely! But surprisingly, too many procurement leaders just categorize leases as “non-impactable” and put it in an “other” category in their initial spend analysis process. Not so with co-author Trowbridge’s advisory firm, which works with large corporate clients to secure enterprise-wide cost savings across many spend categories. When they find any firm with a substantial amount of spending through leases, he and his colleagues turn over that rock and dive deeper. Trowbridge says: “If our client’s equipment lease payments are substantial, there may be an impressive potential for savings.”

Co-author Jim Cross’ firm, which offers its services for free to corporate clients, regularly enables companies to save approximately 20% (on average) during the lifetime of most lease portfolios. Where are savings found in the lease lifecycles? You’ve just got to know where to look (and to keep looking). Just in the last few weeks, the following savings were realized in various phases of several clients’ lease portfolio processes.

• Negotiated a 23% savings on a $650K end-of-term purchase option.
• Reduced the lease rate factor by over 200 basis points on a $5.5M lease.
• Reduced the average lease rate factor by over 150 basis points on a $10M lease portfolio.
• Negotiated a $1.2M savings on end-of-term buyout for medical equipment.
• •Negotiated a 12-month lease extension saving $127K.
• Eliminated interim rent that saved a company more than $250K.

For example, Figure 1 illustrates the “Leaky Pipe” of costs associated with a single company’s $300M lease portfolio. In this case, over $19.2 million in savings were found.

The remainder of this article will describe four ways a business can reduce CapEx and OpEx costs over the lifetime of leased equipment, vehicles and other assets in their portfolio. We will present some best practices in each of the following techniques:

• Discovery. Proactively identify all current lease obligations;
• Optimize lease cost basis through TCO sourcing. Minimize lease base principal costs through a total cost of ownership (TCO) sourcing methodology for new equipment/vehicles;
• Evaluate multiple lease options. Utilize innovative market competition techniques to secure the best
• lease option to cover the intended procurement arrangement; and
• Strategically contract & manage. Understand and mitigate negative clauses in every lessors template agreement. Continuously address cost factors in each stage of the equipment lifecycle.

Technique #1: Discover all current equipment & vehicle leases

This seems simple and obvious—something most companies should be doing in the process of managing business expenditures. But it really isn’t. That’s because equipment purchases are booked differently than equipment leases. Often, procurement may have performed an excellent RFx or negotiation to arrange an equipment or fleet purchase but then asked finance to arrange a lease to finance the transaction.

Guess what? Few accountants are skilled in securing optimal lease arrangements; in fact, many leases facilitated by a finance department are going to be with the CFO’s favorite treasury bank. You don’t invest your retirement funds in the bank that handles your checking account—they don’t provide good ROI on your investment. Nor do treasury banks often offer the best lease rates or terms on equipment leases. Finally, most companies’ finance groups sign lease contracts—not procurement—so the details of those transactions are often very difficult to find.

To complicate this, typical procurement spend analysis tools unknowingly throw lease payments to suppliers with names like ABC Bank, Bank of ABC, ABC Bancorporation, ABC Financial, etc. into a “non-impactable” spend category that no one in operations or procurement ever reviews, i.e. “banking services.” Out of sight. Out of mind.

So how can all your leases be located? Well, put on your Sherlock Holmes cap and start the discovery process.

Best practices in discovery that can be deployed by trained skilled analysts and include the following.

• First step: Transactional spend discovery. Begin by comparing your company’s accounts payable expenditures with an extensive list of 1,000+ firms/suppliers who are active in the leasing markets where you do business (North America, Europe, Asia-Pac, etc). You may also be able to identify payment streams similar to leases by analyzing transactional payment amounts and timing (i.e. monthly, quarterly, etc.). This can be complicated by many other payment streams that have similar timing characteristics, for example, cloud software subscriptions, fixed-fee supplier contracts, facility rentals, etc. Moreover, equipment or vehicle manufacturers sell products and services as well as lease equipment to your company. Consider IBM, which may provide consulting services, software and leased equipment—you need a detailed approach to discern what portion of those payments are leases. But applying sophisticated algorithms through a spend analysis platform can get this done quickly.
• Second step: Lease review. Once each lease is identified, you need to find the actual lease agreement and related documentation, including the master lease, term schedule, certificate of acceptance, equipment rider provisions, lease assignment, etc. (most of which will be scattered across finance and legal groups in the typical enterprise). Then you need to populate and continually update a database with key metadata about those leases, i.e. lessor name, detailed description of leased assets, amount financed, term value, payment value, interest rate, start date, expiration date, end-of-term options, evergreen factors, etc.

Smart companies treat their current lease inventory similarly to a portfolio of investments. Just as most persons have visibility to all their mutual funds, equities, bonds, etc. in their Charles Schwab or ETrade account, so should every corporation have full visibility to its portfolio of leases. This visibility allows strategic management of lease commitments, including proactive planning of equipment and vehicle replacements, strategic timing and adjustment of lease expirations/renewals, coterminous harmonization of lease commitments, etc.

Technique #2: Optimize lease cost basis through TCO sourcing

Let’s face it. Every equipment or vehicle lease contract applies the time value of money for financing the cost of acquiring (and using) an asset. That’s the “principal” to which an interest factor and terms are applied during the term of the lease. So the first step in any transaction is to minimize the principal that drives the payment amounts.

Best practices in strategic sourcing should be applied to any equipment acquisition.

• Having an in-depth understanding of equipment lifecycles, and leading-edge and trailing-edge technologies.
• Identification of alternative products providing similar functionality (i.e., different power systems in vehicles).
• Conducting an RFx event (request for proposal, request for quotation).
• Strategic negotiation of all lifetime cost elements for the proposed asset using a TCO model.

One approach to identifying lifetime costs can be calculated using a TCO model deployed by many corporate procurement groups (see Figure 2).

 

With capital equipment, to the greatest extent possible, it is critical to obtain secure, optimal pricing for both the equipment and all associated operating costs through the intended lifetime of the asset. Remember, as an example, that over the lifetime of a traditional semi-truck the largest cost of operation is fuel, then the driver/operator, then the tractor, then maintenance/lubricants, then the trailer. Focusing only on the cost of the tractor and trailer misses a majority of TCO. Capital aspects of these cost elements need to be optimized over the lifetime of the asset before moving into a lease that finances the transaction. Operational cost elements must be managed closely throughout asset life to keep those costs at a minimum.

Technique #3: Evaluate multiple lease options through competition

Utilize innovative market competition techniques to secure the best lease option to cover the intended procurement arrangement. Once the optimal package is determined, the best lease opportunities should also be sourced. If you do this yourself, at a bare minimum, get three offers from lessors that specialize in this specific asset class, term length and lease structure. Keeping your Sherlock Holmes detective cap on, try to find specialty lessors that target different types of leases. For example, there are big players in unique spend categories like rail cars or aircraft. For a large portfolio of leases, there can be millions of dollars saved by utilizing specialty lessors rather than treasury banks that don’t really want residual risk and outsource the entire end-of-lease process to a third party. Do not allow your CFO to give your package to only their favorite treasury bank without strong competition.

Don’t be surprised if the equipment or vehicle manufacturer or dealer also aggressively tries to become the lessor of the products you’ve been negotiating. If they are able move your negotiated package into a favorable lease arrangement for them, they will take back many of the cost concessions attained in the RFx process and negotiation. Just remember what happens when you try to buy a personal automobile at a dealership—their finance manager always tries to turn a purchase into a lease. Why? Because the dealership makes far more money.

Lease sourcing should go even deeper, though, with other steps involved such as the following.

• Identifying the right lessors.
• Ensuring the right lessors actively participate in RFx.
• Make sure all lessors are pricing to the same terms and conditions, e.g. master lease agreement and schedule, and have all costs contained … right down to stipulated (STIP) loss value tables, equipment return rider provisions, equipment return radius, and asset level flexibility for return on time—extend or purchase. Make sure all lessors are bidding on the same lease package (i.e. apples to apples).
• Perform multi-round strategy for negotiating every facet of the lease proposals.
• Perform an after-tax lease versus buy analysis in a net present value format using purpose-built tools.

If your team is not skilled in soliciting lease proposals, do not try to self-medicate this process. There are advisory firms that offer some of these services for a fee. A good advisory firm will utilize real-time market intelligence to strategically develop equipment leasing RFPs that perform for their clients (at no cost). Unlike the typical multiple months needed to bid and select capital equipment, a sourcing process for leasing can be performed within a few days or weeks.

Technique #4: Strategically contract & manage

Once you have selected the best equipment financing proposal, it is time to contract for your package. Top leasing experts know how to negotiate away many onerous clauses found in a typical lessor’s template agreements. Too often, though, newcomers to leasing fail to understand the many factors that were not presented in a lessor’s proposal (but now appear in that firm’s template agreement). Many clauses are “below the water” in the lease proposal originally solicited.

The visible lease rate factor is usually the main proposal submitted by financiers. But many other cost elements are encompassed as seemingly innocuous “technical terms” found in many lessor contracts. As just the tip of an iceberg can be seen (the lease rate interest factor), it is below the surface where smart buyers need to become educated. Consider the cost factors in a typical equipment lease arrangement (Figure 3).

 

On behalf of many small, medium, and large clients (all the way into Fortune 10 in size), co-author Jim Cross’ company represents such a high volume of lease transactions for their clients that they are able to have nearly all proposals be based upon their form of master lease agreement (which is almost universally accepted by leading financiers).

Once your lease agreement has been signed, it is time to proactively use and manage all elements of the transaction. Many key factors must be closely monitored, including the sometimes challenging responsibility to track every asset in the lease. Countless companies have utilized portfolios of leased items such as computer hardware, multi-function devices (MFDs), material handling equipment, etc. throughout a five-plus year lease term, only to be unable to return the assets upon lease expiration. Then they’re on the hook for repaying the lessor, but at what rate? (What was the FMV language or depreciation formula in the original lease?)

 

Conclusion

The equipment leasing industry is in a continual state of change with frequent mergers, acquisitions, and name changes. Moreover, leasing firm account representatives are constantly switching companies, thus creating an infinite loop of uncertainty. One thing is certain, though: At your expense the equipment leasing industry keeps generating record profits every year.

Inventor Thomas Edison once said: “Opportunity is missed by most people because it is dressed in overalls and looks like work.” Business leaders who take time to “work” consistently through the four techniques in this article can secure substantial cost savings in their cost of acquiring and operating production line equipment, computer hardware, trucks, fleet cars, material handling equipment, rail cars, and even aircraft—thus increasing profitability.

Seize the opportunity to reduce your lease costs.

About the authors

Jim Cross is CEO of Blue Sky Capital Strategies LLC and Mark Trowbridge, CPSM, CSP, C.P.M. MCIPS, is president of Strategic Procurement Solutions LLC.

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