The Difference Between Equipment Financing and Equipment Leasing

Virtually every business needs equipment, which means virtually every business may need to decide between equipment financing and equipment leasing. This article goes over the ins and outs of both to help you decide which is the best option for your needs.

Equipment Financing

In the case of equipment financing, the business borrows money to buy the equipment it needs. The business may need to make a down payment to obtain the funds. The business owns the equipment as long as it makes its payments—typically monthly—to the lender. (If the business fails to make the payments, the lender usually takes ownership of the equipment to recover its losses.) Additionally, the borrower will owe interest on the loan, which will be rolled in with the monthly payment.

Equipment Leasing

In the case of equipment leasing, the business makes monthly payments, just like equipment financing. However, these payments allow for the use of the equipment—not ownership of it. (An exception occurs in the case of lease-to-own arrangements.) Leases typically do not require any money upfront. At the end of the lease, you will likely be able to renew the lease or move on to another piece of equipment.

Financing Versus Leasing

The question of whether equipment financing or leasing is better for your company depends on its goals and needs. According to Inc.com contributor Jared Hecht, financing is a better option if you plan to use the equipment for a very long period of time—that is, past the end of the loan’s terms. Meanwhile, leasing is an attractive option if the equipment is likely to become outdated in the near future. Depending on how your business operates, it might even make use of both methods for different pieces of equipment.

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