Buy or Lease? How to Decide Between an Equipment Loan and an Equipment Lease
A practical decision framework to help you choose between buying equipment with a loan or leasing. Includes real-world examples for different industries and use cases.
The decision to buy or lease equipment is one of the most common financing choices business owners face. There is no universally right answer. The best choice depends on how long you need the equipment, how quickly it becomes obsolete, your cash flow situation, and your tax strategy.
This guide provides a practical decision framework to help you make the right choice for your specific situation.
The Quick Decision Framework
While every situation is unique, these guidelines cover the majority of cases:
| Situation | Likely Best Choice | Why |
|---|---|---|
| Need equipment 3+ years | Buy (Loan) | Build equity, lower total cost |
| Equipment obsoletes in 2-3 years | Lease | Avoid owning outdated assets |
| Cannot make down payment | Lease | Often requires only first payment |
| Want lowest monthly payment | Lease | Payments typically 20-30% lower |
| Equipment retains value well | Buy (Loan) | Asset builds equity, resale value |
| Want depreciation tax benefits | Buy (Loan) | Section 179 and bonus depreciation |
| Need flexibility to upgrade | Lease | Easier to swap at end of term |
| Want to own outright | Buy (Loan) | No buyout needed at term end |
When Buying Makes Sense
Purchasing equipment with a loan is typically the better financial decision when you plan to use the equipment for its full useful life and it retains meaningful value.
- Long-term use: You will use the equipment for 3-10+ years
- Value retention: The equipment maintains resale value (vehicles, machinery)
- Equity building: You want to own an asset and build business equity
- Tax strategy: You want to take advantage of Section 179 or bonus depreciation
- Customization: You need to significantly modify the equipment
- Cash available: You can comfortably make a 10-20% down payment
- Lower total cost: Loan payments are higher monthly but lower overall
Calculate Total Cost of Ownership
Add up all payments plus down payment for a loan versus all lease payments plus any buyout. A loan on a $100,000 machine might cost $115,000 total while a 5-year lease might cost $120,000 plus a $15,000 buyout. Run the numbers for your specific situation.
When Leasing Makes Sense
Leasing is often the smarter choice when flexibility is more valuable than ownership or when the equipment rapidly loses value.
- Short-term need: You only need the equipment for 1-3 years
- Rapid obsolescence: Technology that needs upgrading every few years
- Cash conservation: You need to preserve cash for other priorities
- Lower payments: You need the lowest possible monthly expense
- Off-balance-sheet: You want to keep debt off your balance sheet (operating leases)
- Maintenance included: Some leases bundle service and repairs
- Uncertain future: You are not sure if the equipment will meet long-term needs
Understanding Lease Types
Not all leases are created equal. Understanding the differences helps you choose the right structure.
| Lease Type | Ownership at End | Best For |
|---|---|---|
| Fair Market Value (FMV) | Return, renew, or buy at market price | Technology, uncertain needs |
| $1 Buyout | Ownership for $1 at end | Equipment you plan to keep |
| 10% Buyout | Purchase at 10% of original cost | Balance of flexibility and ownership |
| Operating Lease | Return to lessor | Off-balance-sheet treatment |
The $1 Buyout Lease
A $1 buyout lease is essentially a loan structured as a lease. Monthly payments are higher than FMV leases, but you own the equipment outright at the end. This can be useful if you want lease payment simplicity but plan to keep the equipment.
Industry-Specific Examples
The right choice often depends on your industry and how equipment is used in your business.
Example 1: Restaurant Owner
Maria is opening a new restaurant and needs $80,000 in commercial kitchen equipment including ovens, refrigerators, and prep stations.
- Equipment expected life: 10-15 years with proper maintenance
- Technology obsolescence: Low - cooking equipment changes slowly
- Resale value: Moderate - used restaurant equipment has active market
- Her situation: First restaurant, tight cash flow, strong personal credit
Recommendation: Equipment Loan
Kitchen equipment has long useful life and does not obsolete quickly. A 7-year equipment loan builds equity in assets she will use for the life of her business. If she needs to close, the equipment has resale value. Consider a 10% down payment to improve rates.
Example 2: IT Consulting Firm
James runs an IT consulting firm and needs to upgrade his team with $50,000 worth of laptops, monitors, and servers.
- Equipment expected life: 3-4 years before performance issues
- Technology obsolescence: High - specs outdated within 3 years
- Resale value: Low - 3-year-old computers worth 20% of original
- His situation: 5-year-old business, needs latest technology for clients
Recommendation: FMV Lease
Technology obsoletes quickly and retains little value. A 3-year FMV lease lets James return the equipment and upgrade to new technology when the lease ends. Lower monthly payments also help cash flow.
Example 3: Construction Contractor
David needs an $180,000 excavator for his growing construction business.
- Equipment expected life: 15-20 years with maintenance
- Technology obsolescence: Very low - excavators are mechanical
- Resale value: High - used construction equipment has strong market
- His situation: 3 years in business, steady contracts, good credit
Recommendation: Equipment Loan
Heavy equipment retains value exceptionally well. A 7-year loan builds significant equity. Even after 10 years, a well-maintained excavator might be worth $60,000-80,000. The ownership also allows David to use it as collateral for future financing.
Example 4: Medical Practice
Dr. Patel needs a $300,000 MRI machine for her new diagnostic imaging center.
- Equipment expected life: 10-15 years
- Technology obsolescence: Moderate - imaging technology advances
- Resale value: Moderate - used medical equipment has specialized market
- Her situation: New practice, significant startup costs, excellent credit
Recommendation: $1 Buyout Lease or Loan
Given the high cost and long useful life, either works. A $1 buyout lease provides ownership while preserving cash upfront. A loan might offer slightly better total cost. She should compare quotes and consider which provides better tax treatment with her accountant.
The Monthly Payment Comparison
To illustrate the payment difference, here is a comparison for a $100,000 piece of equipment:
| Financing Type | Term | Monthly Payment | Total Cost |
|---|---|---|---|
| Loan (10% down, 8%) | 5 years | $1,823 | $109,380 + $10,000 down |
| Loan (10% down, 8%) | 7 years | $1,402 | $117,768 + $10,000 down |
| FMV Lease (8%) | 5 years | $1,650 | $99,000 + FMV buyout |
| $1 Buyout Lease (9%) | 5 years | $2,076 | $124,560 |
FMV Buyout Can Be Surprising
Fair Market Value buyouts are determined at lease end, not the beginning. A $100,000 machine might have an FMV buyout of $15,000-$30,000 after 5 years. If you plan to keep the equipment, factor this into your total cost calculation.
Making Your Decision
Use this checklist to guide your decision:
- How long will you realistically use this equipment?
- How quickly does this type of equipment become obsolete?
- What is the resale market like for this equipment?
- Can you comfortably make a 10-20% down payment?
- Do you want to own the asset and build equity?
- Is off-balance-sheet treatment important to you?
- Do you want flexibility to upgrade at end of term?
- Which option provides better tax treatment for your situation?
When In Doubt, Get Both Quotes
Many equipment financing companies offer both loans and leases. Request quotes for both and compare total cost of ownership over your expected use period. A 15-minute comparison can save thousands of dollars.
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Read more →Important Disclosure
Not Financial Advice: The information provided in this article is for general informational purposes only and does not constitute financial, legal, or professional advice. You should consult with qualified professionals before making any financial decisions.
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