Equipment Financing vs. Leasing: What You Should Know for Your Business

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As a small business owner, you have too many tasks to handle besides worrying that your equipment will leave you in the lurch. But upgrading your business equipment — whether brand new or pre-owned — can lead to a significant financial decision. You’ll usually have to decide between equipment financing, where owners take out business equipment loans to purchase the equipment outright, or leasing the equipment to keep cash flow steady.

Whichever you choose, these options will get you the tools, machinery, vehicles or other equipment you need to keep your day-to-day tasks on track. Let’s explore these options and break down when equipment financing or leasing is more appropriate for your business needs.

Equipment Leasing

Many small business owners simply don’t have the cash on hand to purchase new equipment outright or they don’t want to create cash flow problems — that’s when leasing a piece of business equipment can come in handy. By leasing, you’re basically renting the equipment, just like if you lease a car from the dealership. Your lender purchases whatever piece of equipment you want — a new computer, a dump truck, etc. Then you make payments to the lender or finance company to use that equipment. When your lease term ends, you can choose to renew it, end it or in some cases, purchase the equipment.

Leasing can be a good option for businesses that frequently update their equipment or technology because the lease payments allow you to keep your cash in reserves and pay less while always having new, updated equipment. The Tax Cuts and Jobs Act, passed in December 2017, includes a change that makes leasing even more attractive.

According to the IRS, lease payments are 100 percent deductible with no limit. Interest on loans is now only deductible on up to 30 percent of earnings for companies with revenue greater than $25 million. So if your business revenue is greater than $25 million and you’ve traditionally deducted 100 percent of interest payments, it may be a good time to consider leasing instead of paying more taxes.

Blue tractor working the field

Equipment Financing

If you decide to purchase and finance your equipment, looking into business equipment loans may be a good option, especially if you don’t need to update equipment regularly and plan to use the equipment for a long period of time. In this case, your business is the owner of the equipment and you make payments to your lender, just as you do with a home mortgage.

The new tax law also offers a change in depreciation rules that can make equipment purchases — rather than equipment leasing — more attractive to some companies. Traditionally, when a business purchased equipment or machinery, the owner was unable to deduct the entire expense from the taxable income for the year the purchase was made. Instead, businesses were required to depreciate the expense of newly purchased equipment or machinery over a number of years. With the new tax law, business owners can deduct 100 percent of the expense of equipment purchased during the same year.

If the state of your current equipment leaves your day-to-day work open to interruption, it’s likely time you investigate one of these options. Whether you opt for financing or leasing, upgrading your equipment can leave you with the peace of mind to focus on reaching out to new potential customers rather than calling your nearest repair shop.

2 comments on “Equipment Financing vs. Leasing: What You Should Know for Your Business

  1. Millie Hue on

    It got me when you said that it can help a business owner save money when leasing pieces of equipment. Like you said, they wouldn’t have to keep on updating or maintaining the equipment which can be costly. With that in mind, I will make sure that my uncle will be looking for leasing company instead of buying the things that he will be using to start the construction of the houses that he will be renting out to others in the future. Thanks!

    Reply
    • The Bottom Line Team on

      Hi Millie,

      We are happy to hear you found the article helpful. Best of luck to your Uncle!

      – The Bottom Line Team

      Reply

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