Construction firms, agricultural operations, landscaping companies, and businesses operating within many other industries all need access to equipment to perform their valuable work. Unfortunately, heavy equipment can be extremely expensive.

Business owners whose companies are still getting off the ground often struggle with the decision as to whether to buy or lease their equipment, especially if they can’t afford to purchase it outright. There’s no one-size-fits-all answer to the question of whether it’s better to lease or finance equipment, but this article will offer some insight into the issue that might help.

What’s the Difference?

Both leasing and financing equipment involves making monthly payments. The two strategies differ primarily in ownership. When businesses lease equipment, they do not own it, meaning they will have to renew their leases at the end of their terms if they want continued access to the machinery. Equipment leases resemble rental agreements, while equipment financing involves taking out a business loan.

Businesses that finance equipment purchases will only have to make payments until the loan has been repaid, at which point they own the equipment in full. Those who want to purchase equipment via financing can go look at Equify to find a qualified lender.

What is Considered Equipment?

When most business owners think about leasing or financing equipment, they immediately conjure up images of heavy machinery like backhoes, skid-steers, and large tractors. In reality, the term “equipment” can encompass anything from office appliances to company cars, as well. Not all lenders finance all types of business equipment, so it’s important to do some research into what types of loans they offer before choosing one.

Types of Leases

The two main categories of equipment are operating leases and capital leases. Operating leases tend to have lower monthly payments. They allow business owners to use the equipment for the duration of the lease’s term, then when it expires, business owners have the option of paying the then-fair market value for it if they want to buy it.

Capital leases tend to have higher payments, but they’re structured more like equipment loans. As with operating leases, business owners may be offered the option of purchasing the equipment when the lease term has expired. However, the price will be much lower than the market value.

Equipment Financing

While equipment leases cover only the use of the equipment for the duration of the lease term and may or may not include a provision for purchasing it when the term expires, equipment financing allows businesses to take out loans to actually purchase the equipment. The lender will pay for all or part of the price of buying it outright, then the borrower will pay it back with interest over time. Once it’s paid off, the business will own the equipment free and clear.

Pros of Leasing Equipment

Equipment leases don’t require a down payment or collateral. Their terms vary but are often flexible and typically include provisions for payment of repairs by the equipment’s owner. When the term of the lease has expired, business owners have the option of upgrading to newer or more advanced machinery instead of renewing the lease or purchasing the equipment.

Cons of Leasing Equipment

The primary disadvantage of leasing equipment is the price. Although technically leases don’t come with interest payments, business owners often find that they wind up paying more to use the equipment than they would have if they had financed the purchase of their own machines. Those who take out operational leases will find that at the end of the lease term, they’re left in a similar position to when they started since they won’t receive a discount on the equipment if they want to buy it.

Pros of Financing

Financing is a great option for durable equipment that will retain its value well over time. Depending on the borrower’s credit score, business history, and other factors, the interest should be low and the monthly payments roughly comparable to the monthly payments associated with capital leases. Once the loan has been paid off, the business will own the equipment outright and there will be no need to pay an additional purchase price. Overall, the long-term cost of equipment financing tends to be lower than leasing.

It’s easy to qualify for an equipment loan and there’s no need to put up collateral since the equipment itself could be liquidated to pay for the lender’s costs if the buyer fails to make timely payments. It’s always better to take out equipment loans than regular short-term loans, as the interest rates will be better.

Cons of Financing

Some lenders may require a down-payment of up to 20%, although it’s often possible to find lenders that will finance equipment for $0 down. Financing equipment also requires some extra research, since businesses won’t have the option to switch to newer or updated equipment at the end of their loan terms as they would with a lease. Just make sure the tool or machine will retain its value well over time to make the most of the investment and avoid the need for immediate replacement.

Most Important Considerations

The most important factors to consider when choosing whether to lease or finance are how much money the business has available and how quickly the equipment’s value will depreciate over time. If the equipment will be useful for many years to come and the company can afford to make a small down-payment, start looking for a lender. Otherwise, consider a short-term lease.

The Bottom Line

Most business owners find that equipment financing is a more cost-effective solution than leasing if they plan to use the equipment for the foreseeable future, but no one solution’s best for everyone. Make sure to consider available options, company finances, and anticipated depreciation of the value of the equipment before signing a lease or applying for a loan. When in doubt or when unable to qualify for a loan, sign a short-term rather than a long-term lease to keep options open for the future when the term expires.

By Eddy

Eddy is the editorial columnist in Business Fundas, and oversees partner relationships. He posts articles of partners on various topics related to strategy, marketing, supply chain, technology management, social media, e-business, finance, economics and operations management. The articles posted are copyrighted under a Creative Commons unported license 4.0. To contact him, please direct your emails to [email protected].