Equipment leasing is like a rental agreement—you lease equipment for a monthly price. At the end of the lease, you can purchase the equipment. An equipment loan, on the other hand, is just like a business loan. A lender approves you for a lump sum loan based on the equipment value, which you’ll pay back—plus interest—over time.
That’s your quick-and-dirty answer. But as it turns out, the difference between equipment leasing and equipment financing is slightly more complicated. This article will take a look at both options to help you, as a busy business owner, figure out which is the best route to take to get the equipment you need.
Equipment Financing 101
A loan to buy equipment is much like any other business loan. There is a chance you may be asked to put down a certain percent of the total cost of the equipment. Your lender may also want to file a blanket lien against your business or property in order to secure their funds. Further, you’ll undergo the normal loan underwriting process, and will likely be asked for lots of information like your credit score and financials.
Payments will be akin to traditional loan payments, too. Keep in mind that an equipment loan doesn’t necessarily take the individual piece of equipment into account. Should the individual piece equipment become obsolete, for example, the loan is not affected. In a worst-case scenario, you could end up paying off a loan for a piece of equipment that no longer functions as you need it.
The title to the equipment will be released to you once the loan is paid off.
Equipment Leasing 101
A lease, on the other hand, generally requires no money down, no collateral and no lien. It can be quite a bit easier to apply for a lease than a loan, too. Depending on the value of the equipment, you may be able to get approved for a lease in as little as 24 hours. Most lease agreements include an option to purchase the piece of equipment after the terms of the lease are over. This generally means paying off the difference of the lease price and the value of the equipment or some other predetermined amount agreed to by both parties at the commencement of the lease. During the lease, you do not own the equipment. But if you choose to buy the equipment at the end of the lease period, the title to the equipment is released to you at that time.
With a lease, you don’t have to agree to purchase the equipment. In fact, should the equipment become obsolete, you have the option to return it at the end of the lease rather than purchasing it.
Loan or Lease: Which is right for your business?
If you have money to put down and the piece of equipment you intend to finance will last your business a long time, then a loan may be the way to go.
But if you have little money to put down and/or the piece of equipment you intend to finance can quickly become obsolete, then you may want to consider leasing.
Keep in mind that both equipment loans and equipment leasing can offer tax incentives. Speak with your accounting professional if you have questions about which option is right for you from a tax perspective.
Ultimately, it’s up to you to make the right decision for your company.