What’s The Difference Between An Equipment Lease And An Equipment Loan?

Trying to decide whether to finance or lease your next equipment purchase? Find out the key differences between each option in order to make an informed choice for your business.

How Equipment Leasing Works

When you choose to lease equipment instead of a taking out a loan, you still make payments for a specified period, then return the equipment when the lease is done. You also have the option to purchase the equipment after the lease period ends.

You’ll need to check your individual lease agreement, but usually, the purchase price is the difference between how much you paid during the lease and the current value of the equipment. Once you purchase the equipment at the end of the lease, you’ll receive the title.

A major benefit to equipment leasing is that you typically aren’t required to make a down payment. The application process is also easier. Depending on the leasing company, however, you may need to be in business a certain amount of time to qualify for different lease amounts.

Another advantage? The monthly lease payment is generally considered an expense, not debt, which can keep your balance sheet looking better in case you need other financing options further down the road

Which is Better for Your Business: Buying or Leasing? Let Us Show You!

How an Equipment Loan Works

An equipment loan does not typically require a down payment, but providing one will make your request for funding more attractive to prospective lenders.

Also, expect to go through the traditional loan application process of submitting your company’s financial and credit history. Additionally, your lender may require a lien beyond the desired equipment itself in extreme cases. For example, if you’re seeking greater than $150,000 in financing and your business has challenged credit, additional collateral may be called for as a condition of approval.

On the positive side, you can use the equipment depreciation as a tax deduction for every year of the asset’s useful life. Plus, once you pay off the loan, you’ll receive the title to the equipment. If you had a blanket lien put on your business, that will also be removed once the loan term ends.

Both equipment leasing and a small business loan can be effective tools for getting the equipment you need to run your business. Understand the nuances of each option, so you can pick the best solution available for your needs.