Key Takeaways
- Understand the difference between capital leases ($1 buyout) and operating leases (FMV).
- Equipment financing can offer tax benefits under Section 179.
- Approvals are faster than bank loans because the equipment serves as collateral.
Full Guide
Loan vs. Lease: Which is Right for You?
Every business faces the same question when acquiring new equipment: should you finance with an equipment loan or a lease? Both equipment financing options let you get the gear you need without a massive upfront payment, but they work differently and serve different business needs.
This guide breaks down each option so you can make the right choice for your situation.
Quick Answer: If you want to own the equipment and use it for years, choose a loan. If you need flexibility to upgrade frequently or want lower payments, choose a lease.
What Is an Equipment Loan?
An equipment loan is a form of business equipment financing where you borrow money to purchase equipment outright.
How Equipment Loans Work
- You own the equipment from day one: The equipment is yours immediately, though the lender holds a lien.
- The lender places a lien on the asset: Equipment serves as collateral until you pay off the loan.
- You make fixed monthly payments: Predictable payments over the loan term (typically 2-7 years).
- Once paid off, you own it free and clear: No more payments, full ownership, can sell or trade-in anytime.
Pros of Equipment Loans
- Full Ownership: Build equity in a valuable business asset
- Tax Advantages: Claim Section 179 deductions and depreciation
- No Usage Restrictions: Use the equipment however you need
- Long-Term Savings: Often cheaper than leasing over the asset's full lifespan
Cons of Equipment Loans
- Higher Down Payment: Many lenders require 10-20% down
- Maintenance Costs: You're responsible for all repairs and upkeep
- Obsolescence Risk: Technology may become outdated before the loan ends
- Balance Sheet Impact: Appears as debt on financial statements
What Is an Equipment Lease?
Leasing is a commercial equipment financing arrangement where you pay to use equipment for a set period without owning it.
At the End of the Lease Term, You Have Three Choices:
- Return Equipment: Give it back and walk away
- Renew the Lease: Continue leasing newer models
- Purchase It: Buy at residual value
Pros of Equipment Leasing
- Lower Monthly Payments: Preserve cash flow for other needs
- Minimal Upfront Costs: Often requires little to no down payment
- Easy Upgrades: Switch to newer models at lease end
- Off-Balance-Sheet: Operating leases may not appear as debt
Cons of Equipment Leasing
- No Ownership: You don't build equity unless you buy at term end
- Higher Total Cost: Leasing often costs more over the equipment's lifetime
- Usage Restrictions: Some leases limit hours or impose wear-and-tear fees
- Long-Term Commitment: Early termination can be expensive
Equipment Loan vs. Lease: Side-by-Side Comparison
Use this breakdown to compare business equipment loans and leases at a glance:
| Factor | Equipment Loan | Equipment Lease |
|---|---|---|
| Ownership | Immediate ownership - You own it from day one | No ownership - Unless you buy at term end |
| Monthly Payments | Higher payments - But you're building equity | Lower payments - Better for tight cash flow |
| Down Payment | Usually 10-20% - Can be 0% with strong credit | Minimal or none - First/last payment typically |
| Tax Benefits | Section 179 deduction - Plus depreciation | Deduct lease payments - Depends on lease structure |
| Flexibility | Less flexible - Locked into ownership | More flexible - Easy to upgrade |
| Maintenance | Your responsibility - All repair costs on you | Often included - Depends on lease terms |
| Total Cost | Lower long-term - Better for 5+ year use | Higher long-term - Pay for convenience |
| Balance Sheet | Shows as debt - Affects debt ratios | May be off-balance-sheet - Operating leases |
Pro Tip: Calculate the total cost over 5-7 years for both options. Equipment loans usually win for long-term ownership, while leases make sense if you'll upgrade every 2-3 years.
Which Option Is Best for Your Business?
The right commercial equipment loan or lease depends on your specific situation.
Choose an Equipment Loan If:
- You plan to use the equipment for many years (5+ years)
- The equipment holds its value well (trucks, heavy machinery)
- You want to maximize tax deductions (Section 179)
- You have capital for a down payment
- You want to build equity in an asset
Choose a Lease If:
- You need the latest technology and plan to upgrade frequently
- Cash flow is tight and you need lower monthly payments
- The equipment will become obsolete quickly (computers, software)
- You want to test equipment before committing to purchase
- You prefer off-balance-sheet financing
Real-World Example
Construction Company buying a $100,000 excavator:
Loan Option: $2,100/month for 60 months = $126,000 total. You own it outright after 5 years. Resale value approximately $40,000. Net cost: $86,000.
Lease Option: $1,650/month for 60 months = $99,000 total. Return it or buy for $25,000. If you buy: $124,000 total cost.
Winner: Loan saves approximately $38,000 if you keep it 5+ years. But lease wins if you upgrade after 3 years.
Whether you choose a business equipment loan or a lease, the right financing helps your business grow without straining your budget. Use our equipment financing calculator to run the numbers for your specific situation, or compare top equipment financing companies to find the best rates.