Quick overview

Equipment financing gives businesses a way to obtain necessary assets—vehicles, production machinery, medical devices, office tech—without paying full price up front. Lenders or lessors cover some or all of the purchase price; the business repays with scheduled payments. The structure you choose (loan vs lease) affects ownership, balance-sheet treatment, monthly cash flow, and tax rules.

In practice I’ve helped manufacturers and service providers decide between a five-year loan and a three-year operating lease by modeling cash flow, tax impact, and expected obsolescence—outcomes often hinge on whether the equipment will still be competitive at the end of the term.

(Industry context: the Equipment Leasing and Financing Association reports a large share of U.S. firms use financing to acquire equipment; see ELFA statistics for recent trends.)
Source: Equipment Leasing and Financing Association (ELFA), 2023: https://www.elfaonline.org

How equipment financing actually works

  • Loan (equipment purchase loan): The lender advances funds so you buy the equipment and you own it from day one. You repay principal and interest over a set term (often 3–10 years depending on asset life). For tax purposes you generally deduct interest and recover cost through depreciation (see IRS Pub. 946).

  • Lease: A lessor buys the equipment and grants you the right to use it for a set term. Lease types include operating (true) leases and capital/finance leases; terms often run 2–5 years for shorter-lived equipment. Lease payments are typically deductible as a business expense if the lease qualifies as an operating lease for tax purposes.

Key players: the borrower/lessee, lender/lessor, equipment vendor, and often a broker or finance company.

Typical timeline

  1. Identify equipment and get quotes.
  2. Submit application and documentation (business financials, tax returns, equipment quote).
  3. Underwriting evaluates credit, collateral value, and the vendor.
  4. Funds are advanced or lease begins.
  5. Payments begin; at term end, exercise purchase option, return, or renew.

What are the tax implications in 2025?

Tax treatment depends on whether you purchase or lease:

  • Purchasing (loan): You own the property, so you recover cost through depreciation and may qualify for accelerated write-offs. Section 179 allows immediate expensing of qualifying equipment up to the statutory limits—check the IRS Section 179 page for current limits and qualifications (IRS). Bonus depreciation also may apply and has been phased down under current law (see IRS guidance).

  • For depreciation details and qualification rules, consult IRS Publication 946: https://www.irs.gov/publications/p946

  • For Section 179 specifics, see IRS Section 179 Deduction: https://www.irs.gov/businesses/small-businesses-self-employed/section-179-deduction

  • Leasing: For a true operating lease, lease payments are commonly deductible as a business expense. Because you do not own the asset, you generally cannot claim depreciation or Section 179. Some leases (finance leases or capital leases) are treated like purchases for tax purposes; consult your tax advisor and the lease agreement.

Note: Bonus depreciation has been phasing down under current law (the phase-down schedule applied after 2022). Because rules can change, confirm current-year percentages on the IRS site or with your tax professional.

Key terms you should know

  • Residual value: The expected value of the equipment at the end of the lease term. Lower residuals can mean higher monthly payments, and vice versa.
  • Fair market value (FMV) lease: End-of-term purchase price is the market value at lease end.
  • $1 buyout / capital purchase option: A nominal purchase price allowing you to own equipment cheaply at term end—common in finance leases.
  • Security interest / UCC-1: Lender’s legal claim on equipment until loan is repaid. See related entry on security interests for more detail.
  • Term, margin, amortization, covenants, personal guarantee: Standard credit terms that matter for small and new businesses.

For a detailed comparison of leases and loans and how they affect tax and cash flow, see our guide: “Equipment Loan vs Equipment Lease: Tax and Cashflow Implications”: https://finhelp.io/glossary/equipment-loan-vs-equipment-lease-tax-and-cashflow-implications/

Also see our overview: “Equipment Financing 101: Leasing vs. Loaning for Businesses” for a step-by-step breakdown: https://finhelp.io/glossary/equipment-financing-101-leasing-vs-loaning-for-businesses/

End-of-term options: what to expect and how to decide

Most leases offer three common options at the end of the term:

  1. Return the equipment. This is common for operating leases where you don’t want ownership risk. Consider inspection, wear-and-tear charges, and return logistics.

  2. Renew the lease. If equipment is still serviceable and finance rates are high, renewing can preserve cash flow while deferring replacement costs.

  3. Purchase the equipment. Options often include paying the residual (FMV), a predetermined buyout (e.g., $1), or negotiating a purchase price. Buying can make sense when the asset retains value or replacement cost is high.

Other possibilities: upgrade into a new lease (trade-in), refinance the remaining buyout, or negotiate an early termination with the lessor. For specialized assets (like commercial trucks), leases may include industry-specific end-of-term rules (e.g., TRAC leases for transportation).

How to choose: a decision checklist

  • Cash flow vs balance sheet: If preserving cash is top priority and you don’t need to own, leasing may be preferable. If you want asset ownership and tax depreciation, consider a loan.
  • Equipment life and obsolescence: Short lifecycle or fast-advancing tech favors leasing to avoid owning outdated gear.
  • Tax goals: If you need immediate tax deductions and the equipment qualifies, Section 179 or bonus depreciation with a purchase can be attractive—confirm current-year limits with IRS guidance.
  • Cost comparison: Compare total cost of ownership (loan interest + maintenance) vs total lease payments + fees, factoring in residual values.
  • Contract details: Watch for maintenance obligations, insurance requirements, early termination penalties, and residual value guarantees.

Common mistakes and practical protections

  • Mistake: Assuming lease payments are always cheaper. Factor in residuals, fees, and end-of-term charges.
  • Mistake: Overlooking maintenance and repair costs—who’s responsible should be explicit in the contract.
  • Protection: Get the lease or loan terms in writing, have legal review for complex deals, and secure multiple bids from lenders.

Real-world examples (anonymized)

  • Bakery startup: Financed a commercial oven with a five-year loan. Using Section 179 in year one improved after-tax cash flow and allowed marketing investments that increased revenue. (Client results varied; consult a tax advisor.)

  • Construction contractor: Chose a three-year operating lease for excavation equipment to maintain fleet flexibility and avoid resale concerns; returned equipment at term end and leased newer models.

Steps to apply and documentation lenders will ask for

  • Basic documents: business tax returns, bank statements, profit-and-loss statements, equipment quote or invoice, and a government ID.
  • Other items: personal guarantees, UCC filing, proof of insurance.
  • Timeline: Approvals can be rapid (days) for smaller-ticket items or take longer for large, specialized assets.

Small businesses can also explore SBA guidance on borrowing and equipment loans: https://www.sba.gov/funding-programs/loans

Frequently asked questions

Q: Can I finance used equipment?
A: Yes—many lenders finance used equipment, though rates or maximum terms may differ. Collateral condition and residual value are factors.

Q: Will lease payments lower my taxable income?
A: For operating leases treated as rentals, yes—lease payments are generally deductible. Confirm classification with your tax advisor.

Q: What credit score do I need?
A: Requirements vary. Many lenders work with scores in the 600s, but small-business lenders will also evaluate cash flow and time-in-business.

Resources and authoritative guidance

Also read our related articles for deeper comparison and industry-specific guidance:

Professional disclaimer: This article is educational and does not replace legal, tax, or accounting advice. I have advised clients on equipment financing for over 15 years, but your situation may differ—consult a licensed tax professional or attorney before making tax or contractual decisions.