Equipment Financing vs. Leasing: Which Is Right?

Quick summary

Equipment financing means borrowing to buy equipment so your business owns the asset and records depreciation and interest expense. Leasing gives you the right to use equipment for a fixed term; most leases allow return, purchase, or renewal at term-end. Financing usually costs less over a long ownership horizon and builds equity; leasing preserves cash and can be simpler to upgrade. Your decision should weigh cash flow, tax treatment, balance-sheet effects, maintenance responsibilities, and how long you need the equipment.

How financing and leasing actually work

Equipment financing (loan or conditional sale)

• You obtain a loan (bank, specialty lender, or online lender) to purchase the equipment. The lender often takes a security interest in the equipment until loan payoff.
• You own the equipment from day one. On your books you record an asset and a loan liability; you depreciate the equipment for tax purposes and deduct interest expense.
• Typical lenders consider business credit, time in business, debt-service coverage, and collateral value. Many lenders offer terms from 12 to 84 months depending on the asset.

In my practice I’ve seen construction firms choose financing for long-lived, high-use assets (cranes, trucks) because ownership reduced long-term cost and provided collateral for future borrowing.

Leasing (operating lease vs. finance/ capital lease)

• Leasing is a contractual right to use equipment for a defined term. The lessor owns the asset and typically provides the equipment, sometimes with optional maintenance.
• For tax and cash flow, lease payments are often deductible as operating expenses. For accounting, under current U.S. GAAP (ASC 842) most leases put a right-of-use asset and lease liability on the lessee’s balance sheet.
• There are two practical types: operating leases (shorter term relative to useful life, lessee returns the equipment) and finance (capital) leases (structured like a financed purchase with bargain purchase option or term close to life).

Startups and tech firms frequently lease office hardware and computers to preserve cash and remain flexible as technology changes.

Key differences to evaluate

• Ownership and equity: Financing results in ownership and equity buildup; leasing does not (unless you exercise a buyout).
• Cash flow: Leasing generally has lower upfront cost and lower monthly payments; financing requires down payment or higher monthly amortization but can be cheaper over the life of ownership.
• Taxes: Purchases allow depreciation (including possible Section 179 or bonus depreciation where eligible—see IRS guidance on Section 179: https://www.irs.gov/businesses/small-businesses-self-employed/section-179-expense-deduction). Lease payments are often fully deductible as business expenses for operating leases.
• Balance sheet and credit: Both options create liabilities on the balance sheet under modern accounting rules (ASC 842 for leases), but financing often shows a traditional loan payable. Leasing may preserve borrowing capacity differently depending on lender underwriting.
• Maintenance and risk: Owners handle repairs and obsolescence risk. Many leases include maintenance packages or upgrade clauses.
• Flexibility: Leasing is flexible for short-term needs or fast-changing tech; financing is better when you need the asset for the long term.

Tax and accounting considerations

Tax and accounting outcomes differ and can change your decision:

• Tax treatment: Buying gives you depreciation deductions and possible immediate expensing (Section 179 or bonus depreciation when qualifying). Leasing payments are generally deductible as ordinary business expenses for the lessee; confirm treatment with your CPA because some leases treated as finance leases for tax may have different outcomes (IRS and tax counsel guidance recommended).

• Reference: IRS Section 179 information (IRS.gov).

• Accounting (financial statements): Under U.S. GAAP (ASC 842) most leases produce a right-of-use asset and corresponding lease liability on the balance sheet. That means leasing may no longer keep obligations off the balance sheet for many businesses.

• Impact on ratios: Financing increases fixed assets and long-term debt; leases increase right-of-use assets and lease liabilities. Both affect leverage ratios, debt covenants, and return-on-assets metrics.

Cost comparison example (simplified)

Assume a $100,000 machine with a five-year need. Rough illustration:

• Financing: $100,000 purchase, 5-year term at 6% → higher monthly payment but you own at the end and can sell or continue to use. You also get depreciation and interest deductions.
• Leasing: 5-year lease with lower monthly payments, possible purchase option at fair market or bargain price at term-end. No ownership during term but better monthly cash flow.

Run a net present value (NPV) of total lease payments vs. loan payments plus residual value and expected resale. Factor tax effects, maintenance cost differences, and cost of capital. I advise clients to run a 3–5 year cash-flow projection and include after-tax effects before deciding.

Decision checklist — which factors point to financing vs. leasing?

Finance if:

• You plan to keep the equipment past its useful life.
• The asset retains resale value or you want to build equity.
• You want to claim depreciation or immediate expensing where eligible (talk to your CPA).
• You can support a larger down payment or higher monthly payment.

Lease if:

• You need lower upfront and monthly cash outflows.
• The equipment will become outdated quickly (IT, medical devices).
• You prefer bundled maintenance and predictable costs.
• You want the option to upgrade regularly without selling used equipment.

Negotiation and practical tips

• Compare total cost, not just monthly payment. Ask for effective interest rate (APR), fees, and residual values.
• Consider a maintenance-inclusive lease to stabilize operating expense, and compare that against expected repair costs if you buy.
• Negotiate buyout terms in the lease — a fair market value purchase option is common; a bargain purchase option often leans toward a capital-style lease.
• Check covenants: lenders and lessors may impose usage, insurance, and maintenance covenants that affect operations.
• Shop the market: obtain offers from a bank, a specialized equipment lender, and the equipment vendor/lessor. Terms and rates can differ materially.

Common mistakes I see

• Choosing only by monthly payment. Lower lease payments might cost more over five-plus years.
• Forgetting total cost of ownership: include maintenance, downtime, installation, and disposal costs.
• Not checking acceleration clauses, early termination penalties, or residual value guarantees.
• Assuming lease payments are always deductible without checking lease classification and tax rules.

Interlinks and further reading on FinHelp.io

• Learn the basics of equipment loans: Equipment Financing (https://finhelp.io/glossary/equipment-financing/)
• If taxes matter, read about deductions tied to rental arrangements: Equipment Leasing Costs Deduction (https://finhelp.io/glossary/equipment-leasing-costs-deduction/)
• For general asset tax rules: Business Equipment Deduction (https://finhelp.io/glossary/business-equipment-deduction/)

Quick FAQ

• Will leasing always be cheaper? No. Leasing reduces upfront cost but may be more expensive over the long run depending on rates and residuals.
• Can I negotiate lease purchase terms? Yes. Negotiate residual value, buyout price, repair obligations, and early termination rights.
• How does accounting treatment affect lenders? Lenders and investors review balance-sheet lease liabilities; be transparent when applying for loans.

Final recommendation

There’s no universal answer. For essential, long-lived equipment you expect to use for many years, financing often wins on cost and control. For fast-obsolescence items or when cash preservation and upgrade flexibility matter, leasing typically makes more sense. Run a simple NPV comparison with after-tax effects, include maintenance and downtime, and consult your CPA or financial advisor before committing.

Professional disclaimer

This article is educational and not individualized financial, tax, or legal advice. For guidance tailored to your situation, consult a CPA, tax attorney, or licensed financial advisor. For IRS tax rules, see the IRS Section 179 resource: https://www.irs.gov/businesses/small-businesses-self-employed/section-179-expense-deduction and general leasing guidance from the Consumer Financial Protection Bureau: https://www.consumerfinance.gov.

Sources and authority

• Internal Revenue Service, Section 179 guidance (IRS.gov).
• Consumer Financial Protection Bureau — consumer lease and small-business resources (CFPB).
• Financial Accounting Standards Board (ASC 842) — lease accounting overview.