Quick answer

Loans, leases, and sale-leasebacks are the primary equipment financing structures. Each changes who owns the asset, how payments are structured, how the expense appears for taxes and accounting, and how the transaction affects cash flow and borrowing capacity.

Why this matters

Choosing the right structure can preserve working capital, change debt capacity, and influence tax outcomes. The wrong choice can raise long‑term costs, reduce flexibility, or create accounting surprises that affect credit lines and investor reporting.

How the three structures work (practical breakdown)

1) Loans

  • What happens: The business borrows money to buy equipment and owns the asset from day one. The equipment typically secures the loan.
  • Payments: Principal plus interest over a fixed term; amortization schedules vary.
  • Accounting/tax: The asset is capitalized and depreciated; interest is generally deductible as a business expense (see IRS guidance on business expenses and depreciation) (IRS).
  • Pros: Builds equity, predictable payoff, potential to sell the asset later.
  • Cons: Larger initial cash outlay if down payment required, loan appears on the balance sheet as debt.

Real-world use: Loans often suit businesses that expect long asset lives or who want the residual value. A manufacturer buying a long‑lived machine often prefers a loan to capture depreciation benefits.

For related guidance on cash preservation when choosing between loans and leases, see our article: Equipment Loan vs Equipment Lease: Which Preserves Cash Flow?.

2) Leases

  • What happens: A leasing company (lessor) buys the asset and the business (lessee) makes regular lease payments to use it for a specified term. Ownership may remain with the lessor unless a purchase option exists.
  • Types: Operating leases (off‑balance treatment in some accounting standards historically) vs capital/finance leases (treated like purchases under certain accounting rules). Modern accounting (ASC 842/IFRS 16) requires many leases to be recognized on the balance sheet — check with your CPA.
  • Payments: Usually lower upfront costs and structured monthly payments. End-of-term options often include return, renew, or purchase.
  • Accounting/tax: Lease payments are often deductible as an operating expense, but tax and accounting treatment depends on lease classification and the jurisdiction; consult IRS and your accountant (CFPB has consumer-facing lease guidance that explains basic differences) (CFPB).
  • Pros: Conserves cash, easier upgrades, predictable budgeting.
  • Cons: Over long terms, total lease cost may exceed purchase; lease contracts can include strict maintenance and usage terms.

Practical note: Leasing is common for rapidly depreciating technology, medical devices, and short‑term needs where uptime and upgrades matter.

3) Sale‑Leasebacks

  • What happens: The business sells owned equipment to a financier and simultaneously signs a lease to keep using the equipment.
  • Payments: The seller receives cash up front and makes lease payments going forward.
  • Accounting/tax: The transaction converts an owned asset into cash and an ongoing operating expense. Tax consequences can include gain on sale and changes in depreciation treatment — consult your tax advisor and IRS guidance.
  • Pros: Immediate cash for working capital, preserves operations, can improve return on assets.
  • Cons: Potential capital gains tax on sale, new ongoing lease expense, and potential impacts on borrowing covenants.

Practical use: Sale‑leasebacks are often used by businesses that need liquidity without interrupting operations — for example, a logistics company monetizing a fleet while continuing deliveries.

For an overview of leaseback mechanics, see our entry: Leaseback Financing.

A side‑by‑side comparison (decision checklist)

  • Cash flow need now vs long‑term cost: If you need cash now (sale‑leaseback) or want to preserve cash (lease), prefer those structures; if you prefer ownership and lower long‑term cost, a loan may fit.
  • Asset life vs contract term: Buy (loan) when expected useful life >> financing term. Lease when you want regular technology refreshes.
  • Balance sheet considerations: Loans increase liabilities; many leases now also appear on the balance sheet under current accounting rules — confirm with your CFO.
  • Tax considerations: Loans let you claim depreciation (and possibly Section 179/bonus depreciation subject to rules); leases typically let you deduct lease payments. Tax treatment for sale‑leasebacks can trigger gains and affect depreciation. Always confirm with an accountant and review IRS publications on business expenses and depreciation (IRS).

Tax and accounting essentials (practical guidance)

  • Don’t assume: ‘‘Leases are off balance sheet.’’ Modern accounting standards require recognition for many leases. Talk to your CPA about ASC 842 / IFRS 16 impacts.
  • Depreciation vs immediate deduction: Buying may allow depreciation and potential Section 179 treatment or bonus depreciation under U.S. tax rules. Rules and limits change — reference current IRS guidance before relying on projected tax savings (IRS Publication 946) (IRS).
  • Sale‑leaseback taxes: A sale can generate taxable gain and change how depreciation is handled. Structure and timing matter — get advanced tax planning.

Costs & common hidden fees to watch for

  • Lease administrative and termination fees.
  • Early‑buyout or purchase option pricing that isn’t market‑reflective.
  • Maintenance, insurance, and service obligations often placed on the lessee.
  • Sale‑leaseback recapture or deferred gain arrangements with tax traps.
  • Balloon payments or residual value shortfalls on loans.

Ask for a total cost of ownership (TCO) projection that includes all fees, expected maintenance, residual value assumptions, and tax impacts.

Due‑diligence checklist before you sign

  • Verify the lease classification and the accounting treatment with your accountant.
  • Get written maintenance and warranty responsibilities.
  • Request a clear buyout price or end‑of‑term options in writing.
  • Confirm insurance and liability coverage requirements.
  • For sale‑leasebacks: review sales proceeds application, tax consequences, and whether lenders or investors will view the cash as recurring revenue or a one‑time boost.

Negotiation tips

  • Compare multiple lessors and lenders — get term sheets to compare effective interest rates and fees.
  • Negotiate residual values and buyout formulas up front.
  • Seek caps on maintenance cost pass‑throughs and penalties for early termination.
  • If doing a sale‑leaseback, negotiate the sale price independently (use an appraiser if necessary) to establish fair market value.

Short case examples (illustrative)

  • A small manufacturer bought a machine with a 5‑year loan to capture depreciation and lower long‑term cost; the loan allowed them to claim capital improvements on their books.
  • A medical practice leased imaging equipment so it could upgrade technology every three years without a large capital outlay.
  • A retailer executed a sale‑leaseback on display fixtures to free cash for seasonal inventory buys while continuing store operations.

Common mistakes to avoid

  • Assuming lease payments are always cheaper than ownership — calculate TCO.
  • Ignoring accounting standards that bring leases onto the balance sheet.
  • Treating sale‑leasebacks purely as a ‘‘last resort’’ — they can be strategic financing tools when structured correctly.

FAQ (concise answers)

  • Are lease payments deductible? Often yes, as a business expense, but the tax treatment depends on lease type and tax rules — check IRS guidance and consult a tax pro (IRS, CFPB).
  • Will a lease affect my ability to borrow? Leases may affect covenant calculations; many lenders count lease obligations when assessing capacity.
  • Can I sell leased equipment later? Only with the lessor’s permission; leases restrict transfer rights unless otherwise agreed.

Next steps (practical checklist)

  1. Gather asset specs, expected useful life, and desired ownership outcome.
  2. Request term sheets from at least two lenders and two lessors.
  3. Run a TCO analysis including tax scenarios with your accountant.
  4. Negotiate terms and confirm accounting treatment with your controller or CPA.

Important disclaimer

This article is educational only and does not constitute legal, tax, or investment advice. For tax specifics, consult IRS publications and a qualified tax advisor; for contract review, consult a licensed attorney.

Sources and further reading