Equipment Financing: Buy vs. Lease and How to Choose

When you need equipment for your business, financing gives you two primary paths: buy it with a loan or lease it. The right choice depends on your cash flow, tax situation, how long you will use the equipment, and how quickly it becomes obsolete.

Neither option is universally better. Manufacturing equipment you will use for 15 years calls for a different approach than technology that will be outdated in 3 years.

Equipment Loans: Ownership from Day One

An equipment loan is a term loan to purchase equipment. You own the equipment immediately while paying off the loan over time. The equipment itself typically serves as collateral.

Equipment Leases: Use Without Ownership

An equipment lease lets you use equipment for a set period in exchange for monthly payments. At the end, you typically return the equipment, purchase it for fair market value, or renew the lease.

Types of Equipment Leases

Understanding lease types is crucial because they have very different implications:

• Operating Lease: True rental. Payments are operating expenses. Equipment returns at end. Best for equipment you do not want to own long-term.
• Capital Lease (Finance Lease): Functions like a loan. You will likely own at end. Treated as asset and liability on balance sheet. Best when you want ownership but prefer lease structure.
• $1 Buyout Lease: You pay $1 at end to own. Essentially a loan structured as a lease. Tax treatment similar to ownership.
• Fair Market Value Lease: Purchase option at end is FMV. Lower payments but uncertain end cost. Good when technology may be obsolete.

The Real Cost Comparison

Let us compare buying vs. leasing a $100,000 piece of equipment over 5 years:

In this example, buying costs less if you keep the equipment long-term. Leasing costs less upfront and may cost less overall if you do not want the equipment at the end.

When to Buy Equipment

Ownership makes sense in these situations:

• Long useful life: Equipment you will use 10+ years (CNC machines, industrial ovens, commercial vehicles)
• Minimal technology risk: The equipment will not become obsolete quickly
• Strong cash position: You can handle down payment and want to build equity
• Tax optimization: You want Section 179 and depreciation deductions
• High utilization: Equipment will be used constantly, maximizing value
• Customization needed: Owned equipment can be modified freely

When to Lease Equipment

Leasing makes sense in these situations:

• Rapid obsolescence: Technology that will be outdated in 3-5 years (computers, medical imaging, certain software)
• Cash conservation: You need equipment but cannot tie up capital in down payments
• Uncertain duration: You might not need the equipment long-term
• Maintenance included: Some leases include maintenance, reducing hassle and unexpected costs
• Seasonal needs: Equipment needed only part of the year
• Credit constraints: Leases may be easier to obtain than loans for some businesses

Tax Considerations

Tax treatment differs significantly between buying and leasing:

• Section 179 Deduction: Buying allows you to deduct the full purchase price (up to limits) in Year 1. For 2024, the deduction limit is $1,160,000.
• Bonus Depreciation: Additional first-year depreciation on qualifying equipment.
• Lease Deductions: Operating lease payments are typically fully deductible as business expenses.
• Capital Leases: Treated like ownership for tax purposes, with depreciation deductions.

Equipment Type Guide

Here is general guidance by equipment category:

Hybrid Approaches

You do not have to choose one approach for all equipment:

• Core equipment: Buy items you will use for decades
• Technology: Lease computers and tech that will be outdated in 3-4 years
• Vehicles: Buy if high mileage, lease if modest use and you want new every few years
• Seasonal: Rent short-term rather than buy or lease for temporary needs

The Bottom Line

The buy vs. lease decision is not about which is "better" universally. It is about which aligns with your cash flow, tax situation, equipment usage patterns, and tolerance for obsolescence risk.

For long-lived equipment you will use heavily, buying typically builds more value. For rapidly changing technology or uncertain duration needs, leasing preserves flexibility. Run the numbers for your specific situation, including tax implications, and do not forget to factor in the soft costs of ownership (maintenance, insurance, disposal) or leasing (fees, restrictions, end-of-term decisions).