Business Equipment Loan vs. Lease: What’s The Difference?

The primary distinction between equipment leasing and equipment finance is ownership.

An equipment lease allows you to rent commercial equipment from a vendor in exchange for a monthly payment, but you do not own the equipment during the term of the lease.

On the other hand, business equipment loan or finance is a secured loan that allows customers to buy a piece of equipment that they will fully own the loan is paid in full in accordance with its terms.

Which is preferable, a business equipment loan or a lease? This is a frequently asked question, and to be honest, one is not superior to the other. A lease and a loan are very similar and they both serve to finance the purchase of the much needed equipment.

Having said that, a loan is generally regarded as a process of purchasing equipment, whereas a lease is considered as a way of paying for using the equipment. That is correct, but both are a legitimate financial obligation to make payments for a set period of time. The Lessee owns the equipment under a loan agreement, whereas the Lender is the owner of the equipment under a lease agreement.

The term "Lease to Own" has become very prominent in recent years, and many leasing companies are now offering huge discount purchase options at the end of the term. In this case, the lessee must exercise caution when accounting for the lease, as the Government may interpret it as a loan agreement.

Let's take a closer look at some of the factors to consider when deciding whether to finance equipment with a Business Equipment loan or a lease.

The Rate of Interest:

At first glance, the interest rate of a loan may look lower than those of a lease. In fact, the loan rates offered by most lenders are relatively lower than that of their own leasing department.

Lease payments, on the other hand, are generally fully tax free, and when you carefully analyze business equipment loan versus lease, the after-tax interest rate in a leasing is significantly lower than that of a business loan.

Payments in Advance:

Most lending institutions request a down payment ranging from 10% to 25% of the cost of the equipment. A leasing firm, on the other hand, will typically provide 100% financing and simply ask for the initial and last payment at the start of the contract. A leasing firm may also ask some amount as a down payment in case that a business has poor financial state.

Extra Credit Facility:

When reviewing a loan for equipment, a bank would typically consider the entire debt load existing with a specific client, also known as exposure. Banks have exposure restrictions based on their financial size and strength, as well as their operating history. This is usually taken into account while making credit choices. If a loan raises the exposure to the upper limit, it may prevent the usage of standard bank lines of credit for typical operational expenses in the future. By using a third-party leasing business to fund an equipment transaction, a company can keep its existing credit lines and effectively create a new line of credit.

I've worked in the finance industry for over ten years, focusing on new and used equipment financing as well as other finance topics. I've used my expertise and experience to provide one-of-a-kind solutions.