Equipment Loans vs. Equipment Leases?
By now, hopefully you've got a good idea of what the equipment finance is all about. When buying equipment, you've got a few choices. You can borrow money from the bank, you can do a full "equipment financing" with an equipment leasing broker, or you can do an equipment lease. Let's talk about the different types of financing and then the plusses and minuses of each.
Borrow Money From The Bank
If you've got good credit, or you have open or expandable credit lines, you can borrow the money from the bank. Depending on your terms at the bank it may be cheaper than going through an equipment finance company, but not always. Some banks do offer equipment leasing as well.
Advantages of going through the bank:
It will usually be less expensive
Disadvantages of going through the bank:
- Mountains of paperwork
- 85% chance of getting declined
- the process can take several week
- you may tie up your credit lines
- sales tax may be due upfront
- down payments will usually be much higher
There's a lot of names for straight equipment loans, but they pretty much all mean the same thing.
Names include Equipment Finance Agreement (or, EFA), Capital Lease, Finance Lease, $1.00 Buyout.
After making the last payment you own the equipment (for $1). The equipment must be shown as an asset and depreciated - which means the payments aren't fully tax deductable.
Equipment loans are often the most popular option because of a little gem called Section 179. In 2016, you can immediately deduct the full cost of the equipment against your taxes (up to $500,000).
PS - If you are buying some shiny new equipment and your dealer offers special-rate financing (anywhere from 0 to 5%) take the money and run. Neither we nor anyone else can give you a better deal.
Advantages of equipment loans:
- You own the equipment at the end (no balloon payment)
- Immediate tax deductions (up to $500,000 for 2016 under section 179)
- Easier to qualify than a bank loan, with less paperwork
- Low to no down payments
Disadvantages of equipment loans:
- Higher payments than a lease
- Lower tax savings than a lease
Equipment leasing works like leasing a car. You make a set leasing payments for a set number of months, and then you have the option to buy the equipment or walk away from it.
The typical equipment lease has a Fair Market Value (FMV) residual - meaning you'll have to make a payment at the end if you choose to keep the equipment.
Equipment leasing payments are usually 100% tax deductible (check with your accountant though, we are not qualified to give you tax advice...) and payments are lower than on an equipment loan.
Advantages of equipment leases:
- Lower payments than equipment loans
- Payments usually fully tax deductible
- Easier to qualify for with less work than a bank loan
- Fast funding
- Low to no down payments
Disadvantages of an equipment lease:
If you plan on keeping the equipment at the end, you will have to pay a residual.
So are leases or loans better for financing equipment?
We talk to a lot of folks about a lot of different types of equipment, and 9 times out of 10, when we ask whether they'd rather do a loan or lease equipment, the answer is, "loan, definitely a loan."
In some cases, a lease is actually better for your pocketbook, so let's look at when leasing does and doesn't make sense.
Why Equipment Leasing is Sometimes Better Than an Equipment Loan
Let's say you buy some equipment for $50,000 and want to finance it over 4 years. With an equipment loan, no matter which way you spread the deduction, your total write-off of the depreciation is going to be $50,000.
With an equipment lease, however, you write off all the payments as an operating expense.
Is Leasing Equipment Always the Best Choice?
There's no such thing as always in the finance business.
If, for example, you are having an exceptionally great year and have abnormally high income, a faster depreciation may make a lot of sense.
Most equipment financing companies, including ours, can structure the transaction to fit your situation.
More Equipment Finance 101: 7 Basic Questions
- How much does it cost to finance or lease equipment?
- What is the difference between an equipment loan and an equipment lease?
- How do I qualify for equipment financing?
- Can I still lease or finance equipment with bad credit?
- Can a new business qualify for equipment financing?
- What are the tax benefits of equipment loans and leases?
- How does the process work?