The Difference Between Equipment Leasing & Financing 

The difference between equipment leasing and equipment financing is that when you lease equipment you can either return or purchase the equipment once the payback period ends, making it analogous to a rental, or you own the equipment with equipment financing as this is a type of business loan.  

Equipment leasing is for: 

• Short-term usage needs 

• Situations you do not need to own the equipment 

• Equipment that becomes outdated quickly due to upgrades or software updates 

• Companies that have cash flow shortages up front 

Equipment financing is best when a company: 

• Needs the equipment for long term use 

• Wants to own the equipment and have it as an asset 

• Prefers to save money in the long run 

• Has strong cash flow and the equipment is expensive 

If you’re only going to need the equipment for a set time frame, leasing could be better than financing. When you have a long-term need for future projects or future production, financing may be best. Once you own the equipment, it can be sold when you no longer need it or want to upgrade, or used as collateral. Both have interest rates and both have payback periods. The differences and similarities don’t stop there, and that’s why business owners can have a hard time deciding between the two. 

If you’re trying to choose between leasing or financing new or used equipment, the decision comes down to how you want to preserve cash flow since you’re not buying the equipment up front, and what your future needs will be. Below you’ll find a table comparing these two options and some situations where one is better than the other. This way you can make the right decision for your business. 

How equipment leasing and financing are similar 

Here’s how leasing and financing equipment are similar and what the main differences are. 

	Equipment Leasing	Equipment Financing
You own the equipment once the final payment is made	No	Yes
Interest payments	Yes, included in the payment amount.	Yes, paid with each payment and listed as a separate line item.
Interest rates	Fixed	Fixed or variable
Good for future or short-term needs	Short term needs	Long term needs
Length of financing	1 to 5 years	1 to 5 years
Payments	Fixed intervals on a predetermined schedule.	Fixed intervals on a predetermined schedule.
Requires a guarantee	Yes in most situations and can include deposits, collateral, and personal guarantees.	Yes in most situations and can include deposits, collateral, and personal guarantees.
Time to access equipment	Immediate	Immediate
Tax deductible	In certain instances	In certain instances, and possibly under Section 179.
Total cost	Lower short term and higher for long term.	Higher short term and lower for long term.
Early termination fees	Yes if it is in the contract.	Yes if they are not negotiated out. Check for curtailment clauses.
Impacts credit score	Yes if payments are late.	Yes if payments are late.
Is an asset for your company.	No	Yes

Both leasing and financing equipment are similar in that they have set payback periods, and missed payments can be reported to the three business credit bureaus resulting in both having a negative impact on your business credit score.  

Equipment financing loans have separate line items for interest payments and the rate can be fixed or variable, while the interest on leased equipment is built into the payments and likely a fixed rate. And both the payment schedules and the type of interest rates are determined before you sign the leasing or financing agreement.  

Once you’re approved, you get instant access to the equipment, and both can have similar payback periods ranging from 1 to 5 years, but you own the equipment at the end of financing and need to return or buy it after a lease. Leasing is cheaper than financing for short-term needs as the payments are lower, but you don’t get the asset or equity. Financing is cheaper for a longer period of time as you get an asset and spend less than leasing and needing to renew the lease. Once you own the equipment, it is yours without any additional payments.  

Both financing and leasing equipment will likely require collateral and personal guarantees, and both have different ways where they may be tax deductible either as depreciation or as a business expense. You also get to negotiate the terms like rates and payback periods with the lender before you sign the agreement, so make sure you have a list of what you want and need before you go to the signing table. 

Still not sure which is right for you? We’ve got you covered. 

How to choose between the two 

Some situations require both equipment leasing and financing. When there is a piece of equipment you need, but a new model is coming out in two years, leasing the current model for two years keeps your cash flow stronger as the payments are lower and you aren’t stuck liquidating the equipment for the new model. You can negotiate your lease to end in two years and then use equipment financing to buy the new version.  

Pro-tip: If the lessor is also a seller, you may be able to get a lower leasing or purchase cost if you agree to buy the equipment from them at the end of the lease term. 

Leasing equipment is smarter than financing specialized equipment for short-term needs like a one-year construction project that requires a forestry mulcher for clearing farmland or a commercial development, or you need specialized manufacturing machines for a two-year custom order. Because the project requires specific machines to complete that won’t be needed in the future, you’ll save money by making lower payments while you need it, you won’t need to liquidate after the project completes, and you won’t have to pay to store and maintain equipment you won’t be using. 

Equipment financing is a better idea than leasing equipment when your company is offering new services, and the equipment will be required for the foreseeable future. Landscaping companies may decide to start pruning trees and need a cherry picker, and a local bakery that starts selling at commercial volumes will need commercial ovens, mixers, and mass production equipment. Because the equipment is needed for the long run, owning it makes more sense and this equipment can be used as collateral if the company needs to take a small business loan. 

For equipment that breaks regularly or needs serviced, both leasing and financing can make sense. If you lease the equipment, the contract may require you to use an authorized repair person, so you’re stuck working around the lessor and service technicians’ schedule which can disrupt your operations. When you own the equipment, you can choose your own repair people, but you’re responsible for the costs and if it is not insured, replacing it when it is no longer repairable. Working capital loans can be a perfect solution in this situation as they cover repairs to equipment versus buying or leasing the equipment. 

The same goes for wear and tear that causes machines and equipment to break. If it is leased and the cause is covered, the leasing company may replace it free of charge or for a minimal fee. When you finance equipment, you’re responsible for covering the costs of repairs and replacements, unless it is insured.  

Equipment financing has higher upfront costs when buying equipment, but leasing equipment over a longer period of time where you do not gain ownership will cost you more if you need to renew the lease. When your equipment needs are short term, leasing is better on your cash flow than financing. When you need the equipment for a longer period or want to build equity, finance it to keep your cash flow stronger. 

Click here if you’re looking for equipment financing and we’ll match you with top financial providers that specialize in the type of equipment you need. 

SmallBusinessLoans does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only. You should consult your own tax, legal and accounting advisors. 

The Section 179 Tax Deduction allows businesses to deduct the full purchase price of qualifying equipment and/or software purchased or financed during the tax year.