Equipment Loan vs. Lease: Making the Right Choice
When your Dallas business needs equipment, you face a fundamental decision: should you take out an equipment loan and own the asset outright, or lease the equipment and pay for its use over time? Understanding equipment financing options is crucial for making the right choice. We have guided countless business owners through this exact crossroads, and the answer is rarely black and white. Both options have distinct advantages, and the right choice depends on your specific business situation.
In this comprehensive comparison, we break down the key differences between equipment loans and leases to help you make an informed decision.
Understanding Equipment Loans
An equipment loan is a traditional financing arrangement where you borrow money to purchase equipment. The equipment serves as collateral for the loan, similar to a car loan or mortgage.
How Equipment Loans Work
We find that this process is often the most straightforward for business owners to understand. You select the equipment you want to purchase, and the lender advances funds to pay for it.
Then, you make monthly payments over a set term (typically 2-7 years). Once the loan is paid off, you own the equipment outright.
Equipment Loan Characteristics
| Feature | Equipment Loan |
|---|---|
| Ownership | You own the equipment from day one |
| Collateral | The equipment itself |
| Down payment | Typically 10-20% |
| Monthly payments | Fixed over loan term |
| End of term | You own the equipment free and clear |
| Tax treatment | Depreciation and interest deductions |
Understanding Equipment Leases
An equipment lease is a rental arrangement where you pay to use equipment for a specified period without necessarily owning it. We often recommend this path for businesses prioritizing cash flow over equity.
Types of Equipment Leases
Capital Lease (Finance Lease)
- Functions like a loan with ownership intent
- Bargain purchase option at end of term
- Equipment appears on your balance sheet
- Available depreciation and interest deductions
Operating Lease (True Lease)
- Pure rental arrangement
- Return equipment at end of term
- Lease payments are typically deductible as business expenses
- Critical Update: Under ASC 842, these now typically appear on balance sheets for terms over 12 months
Equipment Lease Characteristics
| Feature | Equipment Lease |
|---|---|
| Ownership | Lessor owns until purchase option exercised |
| Collateral | Not typically required |
| Down payment | Often zero or minimal |
| Monthly payments | May be lower than loan payments |
| End of term | Return, purchase, or upgrade options |
| Tax treatment | Depends on lease type |
Key Differences: Loan vs. Lease
1. Ownership Rights
Equipment Loan: You own the equipment immediately. We always remind clients that this grants you the freedom to modify it, sell it, or use it as collateral for other financing.
Equipment Lease: The lessor owns the equipment. You typically cannot modify it without permission, and you must return it in good condition.
2. Down Payment Requirements
Equipment Loan: Most lenders require 10-20% down, though some offer zero-down options for well-qualified borrowers.
Equipment Lease: Often requires little to no upfront payment, preserving your cash for other business needs.
3. Monthly Payment Amounts
Equipment Loan: Payments are typically higher because you are paying for the full value of the equipment plus interest.
Equipment Lease: Payments are often lower because you are only paying for the portion of the equipment’s value you use during the lease term.
4. Balance Sheet Impact (The ASC 842 Update)
Equipment Loan: The equipment appears as an asset on your balance sheet, and the loan appears as a liability.
Equipment Lease:
- Historical View: Operating leases used to be “off-balance sheet,” which improved debt-to-equity ratios.
- Current Reality: Since the implementation of ASC 842, most private companies must now record operating leases longer than 12 months on the balance sheet.
- Our Advice: Do not choose a lease solely to hide debt, as accounting rules have closed this loophole.
5. Tax Benefits
Equipment Loan:
- Claim depreciation deductions (Section 179 limit is $2.56 million for 2026)
- Deduct interest portion of payments
- Section 179 allows deducting the full purchase price in year one
Equipment Lease:
- Capital lease: Similar tax treatment to ownership
- Operating lease: Deduct full lease payment as a business expense
- Bonus depreciation is fading (dropping to 20% in 2026 under TCJA schedules), making expensing rules even more critical to review.
6. End of Term Options
Equipment Loan: You own the equipment. Continue using it, sell it, or trade it in.
Equipment Lease:
- Return the equipment
- Purchase at fair market value or predetermined price
- Renew the lease at reduced rates
- Upgrade to newer equipment
When to Choose an Equipment Loan
An equipment loan makes sense when:
Long Equipment Lifespan
If the equipment will remain useful and valuable long after the loan is paid off, ownership maximizes your investment. We see this often with “yellow iron” like excavators or durable manufacturing presses.
Examples: Commercial real estate, well-maintained heavy machinery, durable manufacturing equipment.
Tax Benefit Priority
If maximizing tax deductions through Section 179 and depreciation is important, ownership provides these benefits.
Equity Building
If you want to build equity in assets that can be sold later or used as collateral, ownership is essential.
Stable Technology
If the equipment type does not change significantly over time, owning prevents you from paying for obsolete features.
Strong Cash Position
If you have capital for a down payment and can handle higher monthly payments, loans often cost less over the long term.
When to Choose an Equipment Lease
An equipment lease makes sense when:
Cash Flow Preservation
If preserving cash for operations, inventory, or other investments is a priority, lower lease payments help. We consistently advise new restaurants to lease appliances to keep cash available for food costs and payroll.
Rapid Technology Changes
If the equipment will be outdated quickly, leasing allows you to upgrade regularly without being stuck with obsolete assets.
Examples: Computer equipment, medical imaging technology, point-of-sale systems.
Uncertain Long-Term Needs
If you are not sure how long you will need the equipment or whether your business needs will change, leasing provides flexibility.
Off-Balance Sheet Preference
If keeping debt off your balance sheet is important for loan covenants or business valuation, operating leases may help.
Bundled Services
If you prefer maintenance, support, and upgrades bundled into one payment, many lessors offer these packages.
Real-World Cost Comparison
Let’s compare the total cost of a $100,000 piece of equipment using realistic 2026 market rates:
Equipment Loan Scenario
- Equipment cost: $100,000
- Down payment: $10,000 (10%)
- Loan amount: $90,000
- Interest rate: 10% APR (Typical range: 8-13%)
- Term: 5 years
- Monthly payment: ~$1,912
- Total payments: $114,720
- Total cost: $124,720 (including down payment)
- Residual value: You own equipment worth approximately $30,000-$50,000
Equipment Lease Scenario
- Equipment cost: $100,000
- Down payment: $0
- Monthly payment: ~$2,250 (Typical lease factor ~0.0225)
- Term: 5 years
- Total payments: $135,000
- Purchase option: $10,000 (Fair Market Value estimate)
- Total cost to own: $145,000
Analysis
In this example, the loan saves roughly $20,000 in total out-of-pocket costs. However, our team points out that the lease required $10,000 less upfront, which could be critical for a business needing that liquidity for inventory.
Industry-Specific Considerations
Construction and Heavy Equipment
Generally favors loans due to long equipment life and strong resale values.
Technology and IT Equipment
Often favors leases due to rapid obsolescence and frequent upgrade needs.
Medical and Healthcare
Mixed depending on equipment type. Imaging equipment often leased; durable medical equipment often financed.
Restaurant and Food Service
Leases popular for kitchen equipment that requires regular upgrades and maintenance.
Transportation and Trucking
Loans common for vehicles with long useful lives; leases popular for newer, fuel-efficient fleet upgrades.
Questions to Ask Yourself
Before deciding, consider these questions:
- How long will I need this equipment?
- How quickly does this technology change?
- What is my current cash position?
- How important are tax deductions this year?
- Will I want to sell or trade this equipment later?
- Do I need maintenance and support bundled in?
- How does this affect my balance sheet and loan covenants?
Hybrid Options
Some financing options combine elements of both:
Fair Market Value Lease
Lease the equipment with the option to purchase at fair market value at the end of the term. Provides flexibility without commitment.
Dollar Buyout Lease
Lease payments structured so you can purchase the equipment for $1 at the end of the term. Functions essentially like a loan.
Sale-Leaseback
Sell equipment you already own to a lessor, then lease it back. Frees up capital while retaining use of the equipment.
Making Your Decision
There is no universally right answer. The best choice depends on:
- Your industry and equipment type
- Your financial situation and goals
- Your tax planning strategy
- Your long-term business plans
- The specific terms available to you
Get Personalized Guidance
At Equipment Financing Dallas Pros, we help Dallas businesses evaluate their options and choose the right financing structure. Our team works with multiple lenders offering both loans and leases, so we can present options tailored to your situation.
Ready to compare your options? Contact us for a free consultation, and we will help you determine whether an equipment loan or lease makes more sense for your business.