Equipment Financing: Loan Versus Lease – Which Makes Sense

Investing in equipment is a crucial step in growing your business. But updating or acquiring equipment can be a major burden on your cash flow. That's where equipment financing can help.

Whether you're updating machinery, expanding operations, or starting something new, equipment financing allows you to spread payments over time with a loan, lease, or custom option without the need for a large cash outlay.

Both equipment loans and leases let you access and even acquire machinery, technology, or capital equipment immediately and pay for it over time. But there's one key difference: ownership.

• Loans (or a line of credit) provide financing to purchase equipment, which becomes a business asset
• Leases are rental agreements, allowing you to use the equipment for a set term, then to return or purchase the equipment at the end of the term

Each option offers pros and cons depending on your financial position, equipment needs, and how long you plan to use the asset.

Businesses of all sizes-from Fortune 500 companies to mom-and-pop shops-can benefit from these arrangements. According to the Equipment Leasing and Finance Foundation, the industry reached an estimated $1.34 trillion in 2023, a 7.1% increase compared to 2022.

Industries commonly using equipment finance include:

• Agriculture
• Construction
• General Office (Capital Equipment)
• Industrial and Manufacturing
• Energy and Environmental
• Information Technology and Technology Services
• Transportation

• You can afford a downpayment
• You plan to keep the equipment long-term
• You want to own the equipment
• The equipment is critical to daily operations
• You consider it a long-term investment that helps generate revenue

• You lack funds for a downpayment
• The equipment is needed for a short-term project
• The technology within the equipment could become outdated quickly
• You want the vendor to handle upkeep and maintenance

Once you've decided to finance equipment, the structure of your agreement will guide everything from cash flow to ownership and long-term planning. Loans and leases each have distinct advantages and understanding how they're built can help you choose the right fit.

Equipment Loan

• May require down payment upfront
• Fixed monthly payments over a defined term
• You have ownership in the equipment and the lien against this equipment is released once the loan is paid in full
• You're responsible for maintenance, insurance, and depreciation

Business Line of Credit

• Provides access to a set amount of funds, which can be drawn, repaid, and reused as needed
• Interest accrues only on the amount drawn
• Typically used for short-term or fluctuating expenses, including seasonal equipment needs
• Equipment purchased with an LOC becomes a business-owned asset once loan is paid off

Equipment Lease

• Functions like a rental agreement, except with both lower upfront and monthly costs
• Common lease types
  • Fair Market Value (FMV): Return, renew or buy at market value
  • $1 Buyout Lease: Own the equipment after final $1 payment
  • Fixed Purchase Option: Buy the asset for a set price at lease-end

The different lease options typically define what will happen to the equipment at the end of the lease, often providing a provision for the business to purchase the asset when the term expires.

Equipment financing, whether loan or lease, has advantages and disadvantages. Equipment loans offer ownership and tax benefits while also carrying depreciation risks and higher upfront costs. Equipment leasing provides flexibility, lower initial costs, and can include maintenance, however, if you plan to utilize the asset long term it can be a more expensive option over the asset's useful life. Consider your business goals, how the equipment will be used, and your available capital when deciding.

Pathward can help. With over 30 years of experience in equipment loans and leases, we understand how to structure solutions that fit many business types. We've been members of the Equipment Finance and Leasing Association (ELFA) for 25 years, and have been repeatedly named to the Monitor 100, which ranks the top equipment financing companies in the U.S.

Fill out our contact form and a representative will reach out to you to discuss your options.