Equipment Financing: Lease vs Buy Analysis
When your business needs equipment, you face a crucial decision: lease or buy? Both options have significant financial implications, and the right choice depends on your specific situation. This guide breaks down everything you need to know.
Understanding Your Options
Equipment Loans (Buying)
Borrow money to purchase equipment outright. You own the equipment and make payments until the loan is paid off.
Equipment Leasing (Renting)
Pay monthly to use equipment for a set period. At the end, you may return it, buy it, or renew the lease.
Key Differences
When to Buy Equipment
1. Long-Term Use
If you'll use equipment for many years, buying usually costs less over time.
Example: Construction Equipment
2. Equipment Holds Value
Some equipment maintains value well, making ownership advantageous.
3. You Want Tax Benefits
Buying offers significant tax advantages:
4. Customization Needed
Owned equipment can be modified to your exact specifications.
5. Strong Cash Position
If you can handle larger payments and want to build equity.
When to Lease Equipment
1. Technology That Changes Quickly
Equipment that becomes obsolete quickly is better leased.
Example: Computers and IT Equipment
2. Cash Flow Constraints
Leasing preserves capital for other needs:
3. Short-Term Needs
If you need equipment temporarily, leasing makes sense.
4. Maintenance Concerns
Many leases include maintenance:
5. Off-Balance Sheet Financing
Operating leases may not appear as debt on your balance sheet.
The Numbers: A Real Comparison
Let's compare options for a $100,000 piece of equipment:
Option 1: Equipment Loan
**Net cost**: $79,380
Option 2: Fair Market Value Lease
**Net cost**: $132,000
Option 3: $1 Buyout Lease
**Net cost**: $83,001
Types of Equipment Leases
Capital Lease (Finance Lease)
Operating Lease
Sale-Leaseback
Tax Implications
Buying Tax Benefits
Leasing Tax Benefits
Questions to Ask Yourself
1. **How long will you use this equipment?**
- 5+ years → Consider buying
- 1-3 years → Consider leasing
2. **Will the equipment become obsolete?**
- Yes → Lease
- No → Buy
3. **How important is cash preservation?**
- Very important → Lease
- Can handle larger payments → Buy
4. **Do you want to own an asset?**
- Yes → Buy
- No → Lease
5. **What's your tax situation?**
- Need deductions now → Buy (Section 179)
- Prefer spread deductions → Lease
The Bottom Line
There's no one-size-fits-all answer. The best choice depends on:
Ready to explore equipment financing options? Check your rate with FastLoan to compare equipment loans and leases from multiple lenders.