Equipment Loans VS Equipment Leases: Which Is Right For You?

Most businesses rely on equipment to operate, from kitchen appliances and office tech to vehicles and heavy machinery. But buying that equipment outright can be expensive, and in some cases, it may not make sense to own something that could become outdated or wear out quickly.

In this guide, we’ll break down the differences between equipment loans and equipment leases, walk through the pros and cons of each, and help you decide which option makes the most sense for your business.

What Are Equipment Loans & How Do They Work?

An equipment loan is financing used to buy business equipment, with the equipment itself usually serving as collateral. If payments stop, the lender can repossess the equipment, and some lenders may also require a blanket lien on your business.

Most equipment loans require a down payment, usually around 10% to 20% of the purchase price, with the remaining balance paid off over time.

Once the loan is paid off, you own the equipment and can keep using it or sell it. This can make sense for equipment you’ll rely on long term, but it may be less practical for items that become outdated quickly.

Choose An Equipment Loan If …

What Are Equipment Leases & How Do They Work?

An equipment lease lets you use equipment for a set period of time in exchange for regular payments, without owning it upfront. The leasing company keeps ownership of the equipment, which often means less money due at the start and faster approval compared to a loan.

Many equipment leases don’t require a down payment, and some include maintenance as long as the equipment is used properly. Because of this, leases can be a good option if you need equipment quickly or want to avoid a large upfront cost.

At the end of the lease, you’ll usually have a few options: return the equipment, buy it, or extend the lease. The buyout terms depend on the type of lease you choose.

Common types of equipment leases include:

• $1 buyout lease: You pay a small amount at the end of the lease to own the equipment outright.
• 10% option lease: You can buy the equipment for a percentage of its original cost when the lease ends.
• Fair market value (FMV) lease: You can buy the equipment for its market value, return it, or renew the lease.

Leases often cost more than loans over time, but they offer flexibility that can make sense for certain types of equipment.

Choose An Equipment Lease If …

Equipment Loans VS Leases Compared

Here’s a simple example of how an equipment loan and an equipment lease might compare for a $12,000 piece of equipment, assuming you want the option to own it eventually:

Ready to get started? Check out our picks for best equipment financing to find great loan and lease options that may be a good fit for your business.