Equipment financing vs leasing: own it, rent it, or something in between

The short version

If you will use a piece of equipment for most of its useful life, owning it (through a loan or a $1 buyout lease) usually costs less over time. If the equipment goes out of date quickly, or you want the lowest possible payment and the option to hand it back, a fair-market-value lease can make sense. The rest of this guide explains why, and walks through the numbers.

Whichever route you take, equipment financing is often one of the easier kinds of business funding to qualify for, because the equipment itself backs the deal. If you stop paying, the lender or lessor can take it back, so they can accept more risk than on an unsecured loan.

How an equipment loan works

With an equipment loan, you buy the equipment and a lender finances part or all of the price. You own it from day one, the lender registers a security interest against it, and you repay in fixed instalments over a term that usually tracks the equipment's useful life, often two to seven years. When the loan is paid off, the lien is released.

• Down payment: some lenders finance 100%; others ask for 10% to 20% down, depending on your file and the equipment.
• Rate: illustrative range roughly 6% to 20%, depending on credit, time in business, and whether the equipment is new, used, or specialized.
• Ownership: yours, with the equipment on your balance sheet. You carry the maintenance and the risk that it loses value faster than expected.

How equipment leasing works

In a lease, the leasing company (the lessor) buys the equipment and you (the lessee) pay to use it for a set term. What happens at the end depends on the type of lease.

$1 buyout lease

Also called a capital lease or finance lease in many contexts. You make fixed payments over the term and then buy the equipment for a nominal amount, often $1. Economically, it behaves a lot like a loan, and accountants often treat it that way. Payments are usually similar to or a little higher than a comparable loan.

Fair-market-value (FMV) lease

Payments are lower because you are not paying off the full value. At the end of the term you can usually return the equipment, renew the lease, or buy it at its fair market value at that time. You do not know that buyout price in advance, which is the main trade-off.

Other variations

You may also see 10% purchase-option leases (a fixed buyout of a set percentage of the original cost) and TRAC leases for vehicles in the US. The same questions apply: what is the end-of-term price, and who carries the risk of the equipment's value?

A worked example

All numbers are illustrative and rounded, to show how the structures compare. Your actual offers will differ.

A restaurant needs a $60,000 kitchen line (ovens, refrigeration, hood work). It gets three quotes.

What the table shows:

• The loan has the lowest total cost to own in this example: about $16,489 in interest over five years.
• The $1 buyout lease costs about $3,591 more than the loan in total here, because its implied rate is higher. Some businesses accept that for a faster approval, 100% financing, or bundled installation costs.
• The FMV lease has the lowest monthly payment and the lowest cash outlay if you return the equipment after four years ($50,400). But if you want to keep it and the market value is $15,000, you pay $65,400 in total, and you have one less year of payments behind you than with the loan. If the equipment is worth more than expected at the end, the buyout costs more.

The right choice depends on how long the equipment will stay useful. A commercial oven may run for well over a decade, which favours owning. A POS terminal or a piece of fast-changing technology may be obsolete in three years, which makes the option to hand it back more valuable.

Ownership, maintenance and risk

When you own the equipment, you decide when to sell or replace it and you keep any value left at the end. You also carry the repair bills and the risk that it becomes obsolete. With an FMV lease, some of that value risk moves to the lessor. Read the lease for who pays for maintenance, insurance, and damage beyond "normal wear and tear", and what return conditions apply. Return shipping and reconditioning charges can add up.

Tax treatment, in general terms only

How a loan or lease is treated for tax purposes depends on the structure of the agreement, your country, and your business. Ask your accountant before you choose. In general terms:

• United States: businesses that own qualifying equipment may be able to deduct some or all of the cost in the year it is placed in service under Section 179, subject to annual limits and rules, or use bonus depreciation. A $1 buyout lease is often treated like a purchase for this purpose; a true FMV lease is often treated as rent, with the payments deducted as a business expense. The IRS publishes details on irs.gov.
• Canada: owned equipment is generally depreciated for tax purposes through Capital Cost Allowance (CCA), with rates set by asset class. Lease payments on a true operating lease are generally deducted as an expense. The CRA explains CCA on canada.ca.

Sales tax on the equipment or on lease payments (GST/HST/PST/QST in Canada, state and local sales tax in the US) also varies. This is general information, not tax advice.

When a loan tends to fit

• The equipment has a long useful life and holds value, such as trucks, heavy machinery, commercial kitchen equipment, or manufacturing tools.
• You want to build equity and keep the equipment after it is paid off.
• You want the lowest total cost and can handle a slightly higher payment or a down payment.

When a lease tends to fit

• The equipment changes quickly (technology, some medical or diagnostic devices) and you expect to upgrade.
• Preserving cash is the priority, and a low monthly payment matters more than total cost.
• You want to bundle installation, software, or service into one payment.
• You are not sure you will need the equipment for its full life.

What lenders and lessors look at

Expect questions about time in business, revenue, credit, and the equipment itself: new or used, price, vendor quote, and how easy it would be to resell. Newer businesses often can still qualify, sometimes with a larger down payment or a shorter term. See our guides on startup business funding, business loans with bad credit, and documents lenders need. For very large purchases tied to real estate or major fixed assets, US businesses may also look at the SBA 504 program; see SBA 7(a) vs 504. In Canada, the Canada Small Business Financing Program can cover equipment through participating lenders.

Questions to ask before you sign

• What is the total of all payments, plus any buyout, fees and taxes?
• For a lease, what exactly is the end-of-term option, and how is fair market value decided?
• Is there a prepayment penalty if I pay off early?
• Who pays for insurance, maintenance and repairs?
• Does the lender want a personal guarantee or a lien on other assets?

Our guide on how to read a business loan offer covers the fine print in more detail.

How CELER Funding can help

CELER Funding is a free referral service, not a lender or lessor. Tell us what you are buying and how long you expect to use it, and we match you with equipment lenders and leasing providers in our network across Canada and the US, so you can compare loan and lease quotes side by side. Lenders may pay us when a deal closes, at no cost to you. Start a free application or compare your options.

This guide is general information only, not financial, legal or tax advice. All figures are illustrative.