Equipment Loan vs Lease - Which Is Right for Your Business?

When your business needs equipment, you face a fundamental choice: should you finance a purchase with a loan or enter into a lease agreement? Both equipment financing options allow you to acquire equipment without paying the full cost upfront, but they work differently and suit different business situations.

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Understanding the differences between equipment loans and leases can save your business thousands of dollars and help you make the right choice for your specific needs.

We see business owners struggle with this decision daily. The difference between a loan and a lease isn’t just about the monthly payment, it is about how that asset sits on your books and affects your tax bill.

I’m going to break down the specific mechanics of each option, compare the real costs, and highlight the new accounting rules that might change your strategy.

Equipment Loans Explained

An equipment loan is a traditional financing arrangement where you borrow money to purchase equipment. You make regular payments (usually monthly) over a set term, and once the loan is paid off, you own the equipment outright.

How Equipment Loans Work

Selection: You identify the specific equipment you want to purchase.
Approval: You apply for financing and receive approval based on credit and cash flow.
Funding: Funds go directly to the vendor or your account.
Repayment: You make fixed monthly payments over the loan term.
Ownership: At the end of the term, you own the equipment free and clear.

The “Soft Cost” Factor

We always advise clients to check how a lender handles “soft costs.”

Many lenders will finance 100% of the equipment hardware but may only cover a percentage of shipping, installation, taxes, and training. These non-hardware expenses can sometimes total 20% of the project cost. A great loan structure covers these soft costs to keep your working capital intact.

Equipment Loan Terms

Loan amounts: $5,000 to $10 million+
Terms: 1 to 10 years (typically matching the equipment’s useful life)
Interest rates: 7% to 15% APR (dependent on creditworthiness in 2026)
Down payment: 0% to 20%
Collateral: The equipment itself usually secures the loan

Equipment Leases Explained

An equipment lease is a rental agreement that allows you to use equipment for a specified period in exchange for regular payments. At the end of the lease, you typically have options to return the equipment, purchase it, or renew the lease.

The Hidden Trap: Interim Rent

We often warn clients about “interim rent” clauses in lease contracts.

This is a fee charged for the days between when the equipment is delivered and when your official lease term begins. If you aren’t careful, you could pay a partial month’s rent that doesn’t count toward your term. Always ask to have the lease start date align with delivery to avoid this extra cost.

Types of Equipment Leases

Operating Lease (Fair Market Value Lease)

Lower monthly payments.
Equipment returned at the end of the term.
May include maintenance.
Accounting Note: Under FASB ASC 842, most operating leases longer than 12 months must now appear on your balance sheet as a “Right-of-Use” asset.
Option to purchase at fair market value.

Capital Lease (Finance Lease)

Higher monthly payments.
Ownership transfers at the end of the term.
You act as the owner regarding maintenance and taxes.
Appears on your balance sheet as debt.
Often includes a bargain purchase option.

$1 Buyout Lease

Similar to a loan in structure.
You own the equipment for $1 at the end of the term.
Higher payments than an operating lease.
Full Section 179 tax benefits apply.
Considered a capital lease for accounting.

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Side-by-Side Comparison

Factor	Equipment Loan	Equipment Lease
Ownership	Yes, after payoff	Depends on lease type
Monthly Payments	Higher	Lower (operating)
Down Payment	0-20% typically	Often none (1st & last month only)
Tax Treatment	Section 179 eligible	Varies (100% write-off for Operating)
Balance Sheet	Asset and liability	Right-of-Use Asset (ASC 842)
Maintenance	Your responsibility	May be included
Flexibility	Own and modify freely	Restrictions on usage/mods
End of Term	Keep equipment	Return, buy, or renew
Total Cost	Usually lower	Usually higher

When to Choose an Equipment Loan

Equipment loans make sense when:

The Equipment Has a Long Useful Life

If you’re buying equipment that will serve your business for 10+ years, ownership through a loan typically makes more financial sense than leasing.

Example: A construction company purchasing a yellow iron excavator expected to last 15 years should likely buy rather than lease. The asset retains value long after the payments stop.

You Want to Build Equity

Loan payments build equity in an asset. Once paid off, you have a valuable asset on your balance sheet that can be sold or used as collateral for future financing.

You Need Full Tax Deductions

We specifically look at Section 179 for clients interested in loans.

Equipment loans allow you to take full advantage of Section 179 deductions. This allows you to deduct the full purchase price of qualifying equipment financed during the tax year, up to the statutory limit.

The Equipment Won’t Become Obsolete

For equipment with stable technology that won’t be outdated quickly, buying makes more sense than leasing equipment you’ll want to replace anyway. This applies heavily to shelving, furniture, and heavy machinery.

You Want to Modify the Equipment

When you own equipment, you can modify it however you want. Leases often restrict modifications to ensure the asset retains resale value for the lessor.

When to Choose an Equipment Lease

Equipment leases make sense when:

Technology Changes Rapidly

If you’re acquiring computers, medical equipment, or other technology that becomes outdated quickly, leasing lets you upgrade easily.

Example: A medical practice might lease an MRI machine. By the time the 5-year lease is up, imaging technology will have advanced, and they can swap for a new model without selling the old one.

You Need to Conserve Cash

We recommend leasing when preserving liquid capital is the priority.

Operating leases typically require no heavy down payment (often just first and last month’s payments). This keeps your cash reserves available for payroll, marketing, or inventory.

You Want Predictable Costs

Some leases include maintenance and service, giving you predictable monthly costs without surprise repair bills. This is common in printer and copier leases.

You’re Testing New Equipment

If you’re not sure you’ll need certain equipment long-term, a lease lets you test it without committing to ownership.

Specific Industry Needs (TRAC Leases)

For our clients in the auto and trucking industries, a TRAC (Terminal Rental Adjustment Clause) lease is a powerful tool. It allows for lower monthly payments and a flexible residual value at the end, specifically designed for over-the-road vehicles.

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Real-World Scenarios

Scenario 1: Restaurant Commercial Oven

A Dallas restaurant needs a $50,000 commercial oven expected to last 15 years.

Loan: $50,000 at 9% for 5 years = $1,037/month. You own it after payment 60.
Operating Lease: $950/month for 5 years. You must return it or pay fair market value to keep it.

Best choice: Equipment loan. The oven has a long life and stable technology. Ownership costs less over time.

Scenario 2: Medical Imaging Equipment

A medical practice needs a $200,000 imaging machine that will likely be outdated in 5-7 years.

Loan: $200,000 at 9% for 7 years = $3,218/month. You own outdated equipment at the end.
Operating Lease: $3,000/month for 5 years. You simply upgrade to new technology at the end.

Best choice: Operating lease. Technology will advance, and the practice avoids the hassle of reselling obsolete hardware.

Scenario 3: Delivery Vehicles

A distribution company needs 10 delivery vans at $40,000 each ($400,000 total).

Loan: $400,000 at 8% for 5 years = $8,110/month. You own the fleet after.
Operating Lease: $6,800/month. Maintenance is included, and you replace the fleet every 3 years.

Best choice: This depends on your internal capabilities. If you have an in-house mechanic, the loan saves money. If you want a “hands-off” fleet management experience, the lease creates efficiency.

Financial Analysis: Total Cost Comparison

Let’s compare a $100,000 equipment purchase to see the raw numbers:

Equipment Loan

Amount: $100,000
Term: 5 years
Interest rate: 9%
Monthly payment: $2,075
Total payments: $124,500
Residual value: $30,000 (Asset value you retain)
Net cost: $94,500

Operating Lease

Amount: $100,000 equipment value
Term: 5 years
Monthly payment: $1,850
Total payments: $111,000
Residual value: $0 (returned)
Net cost: $111,000

In this example, the loan costs less over the full term because you retain the asset’s residual value. However, the lease offers a lower monthly payment ($1,850 vs $2,075), which might be necessary for tight cash flow months.

Tax Considerations

Equipment Loans

Section 179 deduction: For 2026, the deduction limit is projected to be over $1.2 million (indexed for inflation). This allows you to write off the entire purchase price immediately.
Bonus depreciation: Under current tax law, bonus depreciation drops to 20% in 2026.
Interest payments: These are fully deductible business expenses.

Equipment Leases

Operating Leases

Payments are treated as a rental expense.
Payments are 100% tax-deductible.
There is no depreciation schedule to track.

Capital Leases & $1 Buyout

Treated similarly to loans for tax purposes.
You claim depreciation and interest deductions.

We urge you to consult a CPA. The difference between a 20% bonus depreciation (loan) and a 100% rental expense write-off (lease) can significantly alter the “true” cost of the financing.

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Questions to Ask Before Deciding

How long will this equipment remain functional and compliant?
Does the equipment value drop to zero quickly (tech), or hold value (heavy machinery)?
What is your current monthly free cash flow?
Do you have an in-house maintenance team?
How will the new ASC 842 lease accounting standards affect your balance sheet ratios?
Do you need the Section 179 tax break this year to offset high profits?
Do you anticipate needing to modify the equipment?

Making Your Decision

There’s no universally “right” answer between loans and leases. The best choice depends on your specific business situation, financial goals, and the nature of the equipment.

If you’re still unsure, Equipment Financing Dallas Pros can help you analyze your options. We’ll review your specific situation, explain the pros and cons of each approach, and help you find the financing solution that best fits your Dallas business.

Equipment Loan vs Lease: Which Is Right for Your Business?