The Difference Between Equipment Leasing and Financing

Purchasing the equipment or heavy machinery your business needs to maximize efficiency can be a substantial expense. Instead of dipping into valuable cash reserves, many companies turn to equipment leasing or loan financing.

Industries most often defer payments for products like:

  • IT systems or technical hardware
  • Construction equipment
  • Transportation fleets
  • Agricultural machinery

Leasing or applying for a loan can delay the expense and allow time for the equipment to begin contributing to your cash flow, theoretically paying for itself.

Options for Equipment Financing

If your business falls short of the eligibility requirements for a traditional bank loan or if you need a more flexible financing option, here are two methods for purchasing large equipment or machinery:

1. Equipment Leasing

An equipment lease is much like a rental agreement and usually doesn’t require any down payment. The lender will often work with you to customize the payments to work best with your business’s budget. The lease contract is usually executed directly with the manufacturer, and the equipment generally serves as collateral.

If you need to finance several pieces of equipment or build a system, one blanket contract can often oversee each separate lease. The agreement frequently includes installation, service, and maintenance, and when the lease term is up, you will generally have several options. You could end the contract and return the equipment, extend or transfer the lease to upgraded machinery or purchase it from the lessor.

An equipment lease is usually the best option if you need machinery for a specific, short-term project or only intend to use it for three years or less. Leasing is also often ideal for equipment that loses value quickly or becomes obsolete as newer versions are released every few years.

2. Equipment Loan

Equipment loans are often preferred for permanent components of your business’s internal processes, such as manufacturing equipment, delivery, and service vehicles or powered construction equipment. Usually more easily obtained than a traditional bank loan, an equipment loan is a lump cash payment issued by the lending institution. It generally requires a down payment of about 25% and scheduled payments with interest until the debt is satisfied.

The bank could secure the loan in a couple of different ways; you might put up existing fixed assets as collateral, or the loan can be self-securing – the equipment itself will act as collateral. After the loan has been repaid, ownership will transfer to your company.

Since there are benefits and drawbacks to any financing option, you should carefully consider the details before you decide on equipment leasing or financing. Either way, you should be able to outfit your business with the tools you need to remain competitive and increase your revenue stream.