How it works
Businesses lease everything from manufacturing presses to IT infrastructure instead of purchasing outright. The lessor — often a commercial finance company — purchases the asset from the vendor and grants you usage rights for a fixed term. You compensate them for the value the equipment loses during that window plus a financing charge on the capital they've tied up.
Three inputs drive the arithmetic on any commercial lease agreement:
| Parameter | Role in the contract |
|---|---|
| Capitalized cost | The negotiated equipment price the lessor finances on your behalf |
| Residual value | Projective end-of-term equipment worth, set as a percentage of cap cost |
| Money factor | The lessor's financing rate, quoted as a decimal rather than APR |
A higher residual shrinks the depreciation slice you owe. A lower money factor shrinks the financing charge. Sales tax applies on top of the monthly base in most jurisdictions.
The formula
M = (C − R) / N + (C + R) × MF, then M_taxed = M × (1 + T)
Where C is capitalized cost, R is residual value in dollars, N is the lease term in months, MF is the money factor, and T is the sales tax rate as a decimal.
Worked example
A bakery leases $25,000 of commercial production equipment on a 36-month contract. The lessor sets residual value at 30% and quotes a money factor of 0.0018. Local sales tax runs 6%.
First, determine the residual value in dollars:
Residual dollars: $25,000 × 0.30 = $7,500
Next, calculate the depreciation fee — the equipment's value loss spread across the lease term:
Depreciation fee: ($25,000 − $7,500) / 36 = $486.11
Then compute the financing fee, charged on the sum of the cap cost and residual:
Financing fee: ($25,000 + $7,500) × 0.0018 = $58.50
Add both fees for the pre-tax monthly base payment:
Base payment: $486.11 + $58.50 = $544.61
Apply sales tax to get the actual monthly outlay:
Monthly payment: $544.61 × 1.06 = $577.29
Over 36 months the bakery pays roughly $20,782 in total lease payments — and returns the equipment or arranges a buyout at the $7,500 residual figure.
Things to watch
Money factor quoting is the most common source of confusion in commercial leasing. Lessor paperwork sometimes buries this decimal among denser contract language. Always convert it: multiply by 2,400 to approximate the equivalent APR. A 0.0018 factor equals about 4.32% APR, which lets you compare against a conventional equipment loan.
Watch for additional charges that sit outside this core calculation — acquisition fees, disposition fees at return, and mileage or usage limits on certain equipment categories. These don't appear in the formula but appear on the contract.
This tool provides estimates for planning purposes, not professional financial or tax advice. Lease structures vary by lessor, jurisdiction, and equipment category — review your specific agreement before signing.