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Equipment Loans vs Equipment Leases: The Basics

10/19/16 11:22 AM

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Almost all business equipment can be financed. As a general rule, any type of new or used equipment that generates income or saves time and labor for your business can be financed. Generally, businesses have two options ─ either securing a loan to purchase the equipment or leasing it. Each method has different advantages.

When deciding which option is best for you and your business, consider the potential revenue derived from using the equipment; how quickly it will be outdated; the size of the equipment; who bears responsibility for maintenance; and overall costs.

Payment Terms

Loan – The advance of funds is repaid with interest over a specific period of time.

Lease – Payments for the equipment rental are set up for a determined number of months.

Down Payment Requirements

Loan – An equipment loan usually requires a down payment and then finances the remaining cost of the equipment. In addition to the down payment, your first loan payment is typically due within 30-45 days of the loan closing.

Lease – No down payment is required. A true lease finances 100 percent of the value of the equipment expected to be used during the lease term. A lease payment is usually required right away after the closing of the loan, but that amount is generally much lower than a down payment.

Depreciation Allowance

Loan – Borrowers may claim a tax deduction for a portion of the loan payment as interest and for depreciation, which is tied to IRS depreciation schedules.

Lease – In a true lease, you may claim the entire lease payment as a tax deduction. The equipment write-off is tied to the lease term which can be shorter than IRS depreciation schedules. This can result in larger tax deductions each year. Additionally, the deduction is the same each year which helps simplify budgeting. Note, however, that equipment financed with a conditional sale lease is treated the same as owned equipment.  

*It's important to consult your accountant to discuss tax deductions and IRS depreciation schedules.

Obsolescence Risk

Loan – The borrower bears all the risk of equipment devaluation due to the development of new technology.

Lease – The risk of equipment obsolescence is transferred to the leasing company since no obligation exists to own the equipment at the end of the lease. Some leases contain provisions for upgrading equipment during the lease term for additional payment.

Inflation Impact

Loan – A larger portion of the financial obligation is paid in today’s dollars, which are more expensive.

Lease – More of the cash flow, especially the option to purchase the equipment, occurs later in the lease term when inflation makes those expenses cheaper.

Business Financing Planning

The decision to buy or lease will affect many areas of your business’s finances and operations. There is no one “right” answer when it comes to leasing vs buying equipment. Every situation is different. To be sure you are covering all your bases, we recommend maintaining a strong relationship with your business team - your attorney, your accountant, your lender, and other trusted resources - so you draw on their experience and expertise as you make this important decision.

At Lincoln Savings Bank, we can help you with the purchase, lease or refinance of new and used equipment. Check out our online Business Lending Network or contact us at bln@mylsb.com and one of our business loan experts will be happy to answer any questions you may have. 

Lincoln Savings Bank, Member FDIC
Jeremy Thesing

Written by Jeremy Thesing

SBA Commercial Lender