Leasing machinery and equipment: what to watch when financing your plant

Machinery is financed differently from cars: there are no value caps, but questions arise about the term, servicing and residual value. We show how to match the lease to the machine's life cycle.

Leasing machinery follows different rules from leasing passenger cars, and that is good news for manufacturing, construction and catering businesses. The restrictions that strip much of the tax benefit from cars simply disappear.

No value cap

The most important difference: the caps of 100 000, 150 000 and 225 000 zł apply only to passenger cars. A machine, a production line, a forklift or a convection oven are not subject to that proportion.

This means the entire operating lease instalment is a deductible cost, whether the equipment costs 80 000 or 800 000 zł. The same goes for VAT — on an asset used in the business you reclaim it in full, with no 50% restriction and no mileage log.

Match the term to the machine's life cycle

This is the decision where a costly mistake is easiest to make. A lease should end before the machine begins to lose productivity, but not so early that the instalment strangles cash flow.

• Equipment with rapid technological turnover, such as IT hardware or numerically controlled machines with a short generational cycle: 24–36 months.
• Production machinery with a long working life, presses, lathes, refrigeration units: 48–60 months, sometimes longer.
• Heavily worked construction equipment: rather shorter, because residual value is decided by running hours, not the calendar.

The minimum term of an operating lease follows from the normative depreciation period of the asset and for most machinery means at least 40% of that period. An agreement concluded for less can be reclassified for tax purposes.

Insurance: not just fire

A standard property policy for machinery covers fire and natural events, but in practice the most frequent losses come from elsewhere. Two extensions are worth considering:

• Machinery breakdown cover. It covers mechanical and electrical failures, operator error and short circuits — the things that actually bring production to a halt.
• Business interruption cover. It compensates the revenue lost during a stoppage. On a machine critical to the process it can matter more than the value of the equipment itself.

For a machine that is a bottleneck in production, work out what a week of downtime costs. If the figure exceeds the annual premium for business interruption cover, the decision makes itself.

Buy-out value and what comes after

With machinery, the buy-out has a different meaning than with cars. A working machine is usually still productive after five years, so a low buy-out value in the 1–5% range is the natural arrangement. A high buy-out makes sense only if you plan to replace the equipment as soon as the agreement ends.

Check too whether the agreement allows early buy-out and on what terms. In a fast-growing business a machine is sometimes replaced by a more capable one ahead of schedule.

The most common mistakes

Three recur regularly. The first is financing a machine over a term longer than its genuine usefulness. The second is overlooking the accompanying costs — transport, installation, connections, operator training — which on large equipment can reach the mid-teens as a percentage of value and can also be included in the financing. The third is the absence of provisions on servicing and parts availability, which bites with imported machinery.