Equipment Leasing vs. Financing | Bankrate

Access to the right equipment may be essential to your business’s growth. However, buying it outright can be costly, especially for newer businesses or those with limited capital. Whether you need office technology, semi-trucks, tractors or heavy machinery, the upfront expense can be a major barrier.

While general business loans can help, exploring equipment leasing vs financing can help you secure essential tools for your business without a large upfront investment. Getting an equipment loan allows you to purchase equipment over time and eventually own it, while equipment leasing offers lower monthly payments and flexibility if you plan to upgrade frequently.

Understanding the differences between equipment leasing and financing can help you choose the best option for your budget, cash flow and long-term goals.

Equipment leasing vs. financing

Both leasing and financing give your business access to the equipment it needs to function. A lease works as a rental agreement and generally has a lower month-to-month cost.

Equipment financing is a type of business loan that typically costs more monthly than a lease but may result in paying less overall. This is because you own the equipment outright once the loan is paid off. Depending on the type of lease you sign, your business may lose access to the equipment you need and any residual value that equipment may still have.

Here are some of the key differences between equipment leasing and financing:

Both are valid options for business owners. Just keep in mind how you plan to use the equipment and what it will cost to keep and maintain it each month.

What is equipment leasing?

Equipment leasing is what gives you access to much-needed equipment without the higher monthly cost associated with a loan. In many cases, your business can also avoid a down payment, saving you thousands.

It is a common choice for businesses that don’t have the capital to purchase a piece of equipment outright or afford a down payment. Depending on the type of lease, you will either rent and return the equipment or purchase it with a balloon payment at the end of the lease period.

Either way, you will make monthly payments toward the equipment as you use it. You may be responsible for maintenance and other taxes, but overall, it is considered a less expensive option when compared to equipment financing.

Types of leases

There are two primary lease options available to businesses: capital and operating.

• Capital lease: A capital lease allows you to purchase the equipment at the end of the lease period. You pay insurance and taxes on the equipment, maintain it and can count it as a liability. At the end of the lease, you can buy the equipment. This may result in a balloon payment where you owe the remaining amount that wasn’t paid through the lease at once.
• Operating lease: An operating lease is a short-term rental agreement that functions like a consumer lease. You can cancel as needed and are generally not responsible for maintenance. However, you may not be able to buy the equipment at the end of the lease period and can’t count it as a liability for tax purposes.

The type of lease you agree to will depend on the company you work with, the equipment you need and the duration of the lease itself.

For example, a capital lease may be better if a larger piece of machinery is too expensive to purchase outright, but your business can afford to maintain and insure it. An operating lease is better suited for equipment that quickly becomes outdated.

Cost of equipment leasing

The cost of leasing equipment can vary widely depending on the type of equipment and lease you choose. You may also be responsible for a few common fees.

Pros and cons of equipment leasing

Pros

• Ability to stay up to date on the latest industry tech
• More affordable monthly payments
• Typically no down payment

Cons

• Balloon payment to buy out a capital lease
• Lose residual value and equity of equipment
• Unable to write depreciation off on taxes

What is equipment financing?

Equipment financing, also known as equipment loans, is the process of borrowing money to pay for a piece of equipment or machinery. They are especially handy for equipment your business will need for years to come. If it is unlikely to become obsolete or unrepairable, a loan allows you to own the equipment outright. Once you do, you can use or sell it. Many businesses prefer an equipment loan to a small business loan because the equipment acts as collateral, which may result in better terms.

After you receive the funds, manage your equipment loan wisely. Late payments can cause fees to rack up and could potentially impact your credit. Since the monthly payment on an equipment loan is generally higher than on a lease, you may need to carefully control your cash flow to make your payments in full.

Where to get an equipment loan

You can find equipment loans through various sources, including banks and alternative lenders. Equipment loans may also be available directly through the seller, though it depends on the type of equipment you are purchasing and the size of the seller.

Some of the best equipment business loans are alternative lenders because of their speed and minimal requirements. For instance, iBusiness Funding (formerly Funding Circle) has a low revenue requirement for business owners, and many other top lenders only require a minimum personal credit score of 600.

Equipment loans from banks may come with stricter qualifying criteria, but might also command more competitive interest rates. Established businesses with good monthly and annual revenue should look into these, as well as SBA loans, to get the best terms.

Cost of equipment financing

Like most business loans, several common fees are associated with the cost of financing equipment.

Pros and cons of equipment financing

Requirements for equipment leasing and financing

Leasing and financing equipment have similar requirements for approval. To get an equipment loan, you can expect to show proof of:

• At least two years in business
• Personal credit score in the good to excellent range
• Annual revenue of $100,000 or more

To lease a piece of equipment, you may also need to meet a minimum amount — some equipment is too inexpensive to lease. Other qualifications vary, and many lenders will require you to exceed the minimum eligibility requirements to score the lowest rates on the best loan or lease. It’s best to be prepared with the documents needed to get an equipment loan, such as bank statements and tax returns, to expedite the application process.

Bottom line

Both leasing and financing equipment are useful ways to get your business the equipment it needs. Leasing is one of the top alternatives to equipment loans because it has a generally lower monthly cost. But you lose out on any equity the equipment may have. If you don’t want to go the equipment financing route, a startup loan may be a way to pay for your new assets.

Ultimately, the right choice will depend on your business and the type of equipment you plan to use. Long-lasting machinery may be better funded with a loan, while a lease may be better for tech that sees frequent updates. Consider overall cost and end-of-loan or end-of-lease scenarios when making your decision.

Frequently asked questions

• What is the difference between leasing and financing in business?
  

  Leasing is similar to a rental contract, where you only use the equipment for the duration of the lease. Financing involves taking out a loan — in this case, secured by the equipment — and paying it back for five to 10 years. Once the repayment is complete, your business owns the equipment outright.

• Is it better to lease or finance equipment?
  

  It depends on the type of equipment your business needs and the speed your industry changes. Some types of equipment, like tractors or large machinery, are durable. They may last decades if properly maintained, so financing is worthwhile for many businesses. Office technology like a fax machine or copier may be better to lease since the technology advances quickly, making older machines obsolete.

• What are the disadvantages of leasing equipment?
  

  While you can certainly purchase your equipment at the end of a capital lease, you may have to make a large balloon payment — which can strain your business or require a separate business loan. If you opt for an operating lease, you will lose access to your equipment and any residual value since the equipment must be returned to the lessor.