Equipment Financing vs Equipment Leasing: Which Is Right for Your Business?

#What is the difference between equipment financing and equipment leasing?

Equipment financing is a loan: the lender pays the vendor, you take ownership of the equipment, and you repay the loan over a fixed term, typically 24–84 months. The equipment is the collateral; a UCC-1 gets filed against it specifically.

Equipment leasing is a rental contract: the lessor (a leasing company or bank) buys and owns the equipment, and you make monthly payments for the right to use it over the lease term. At the end of the lease, you typically have three options, return the equipment, renew the lease, or buy it at fair market value or a stated residual.

The two products solve the same surface need (get equipment in service today, pay over time) but produce very different outcomes for ownership, tax treatment, balance sheet impact, and total cost.

#How is equipment financing structured?

A typical equipment loan:

• 80–100% loan-to-value on new equipment; 70–85% on used
• Term equal to or shorter than the equipment's useful life (24–84 months)
• Fixed interest rate, usually 7–18% APR depending on credit and equipment type
• Monthly amortizing payments
• Equipment-specific UCC-1 filing
• Title and registration in the borrower's name (for titled vehicles and equipment)

The lender pays the vendor directly at closing. You own the equipment from day one and depreciate it on your tax return.

#How is an equipment lease structured?

The two common lease structures:

Operating lease ("$1 buyout" or "true lease")

• Lessor retains ownership and tax depreciation
• Monthly payments deductible as operating expense
• End-of-term options: return, renew, or buy at fair market value (FMV) or stated residual
• Off-balance-sheet under older accounting standards; on-balance-sheet as right-of-use asset under ASC 842 for most companies

Capital lease (or "finance lease")

• Treated as a purchase for accounting and tax purposes
• Borrower depreciates the equipment and deducts interest portion of payments
• Title transfers at end of term, often for a $1 buyout
• Functionally a loan in lease clothing

The legal label matters. Talk to your accountant before signing, the tax treatment of "operating" vs "capital" lease has real consequences.

#How do they compare side by side?

#What does this look like in dollars?

#What about Section 179 and bonus depreciation?

Section 179 of the Internal Revenue Code lets businesses deduct the full purchase price of qualifying equipment in the year placed in service, up to an annual limit. Bonus depreciation lets you depreciate a percentage of the cost in year one, with the balance over the equipment's useful life.

Equipment you finance via a loan or capital lease is eligible for Section 179. Operating-leased equipment is not, the lessor takes the depreciation; you deduct the lease payment as an operating expense.

This single tax distinction can flip the buy-vs-lease decision. A profitable business in a high tax bracket benefits more from owning and writing off the equipment. A new or low-margin business with limited taxable income may prefer the simpler operating-expense deduction of a lease. Always confirm the math with your CPA, the rules change frequently.

#When does equipment financing win?

Choose financing when:

• You will use the equipment for 5+ years (vehicles, machinery, kitchen equipment)
• You have taxable income to offset with Section 179 / bonus depreciation
• You want to build balance-sheet assets for future borrowing capacity
• The equipment holds value (forklifts, construction equipment, restaurant equipment)
• You want a lower total cost of ownership over the asset's life

#When does leasing win?

Choose leasing when:

• The equipment will be obsolete in 3 years (computers, networking, certain medical equipment)
• You upgrade frequently (fleet vehicles, point-of-sale systems)
• You want to preserve borrowing capacity for other working capital
• You prefer simpler accounting (lease payment in, deduction out)
• The vendor offers manufacturer-subsidized lease pricing that beats third-party financing

#How does the qualification process work?

For equipment financing under $250K, most lenders run a streamlined process:

• Application + 3 months business bank statements
• Vendor invoice or quote
• Soft credit pull on owners
• Decision in 24–72 hours, funding to vendor in 2–5 business days

For larger deals or used equipment, lenders may require:

• Two years of business tax returns
• Equipment appraisal (especially used)
• Hard credit pull at offer acceptance
• Personal guarantee from owners with 20%+ equity

ICG offers equipment financing with funding in 2–5 business days. For broader working capital comparisons, see revenue-based vs term loan.

#What questions should you ask before signing?

1. 1Is this a loan, an operating lease, or a capital lease? (Get it in writing.)
2. 2What is the total of all payments over the term?
3. 3What are the end-of-term options, and what does each cost?
4. 4Is there a maintenance or service contract bundled in?
5. 5Can I buy out the lease early, and what is the formula?
6. 6Is the vendor offering a competing rate I should compare against?
7. 7What is the residual value assumption, and how is it determined?

The honest answer to "finance or lease" almost always depends on (1) how long you will use the equipment, (2) your current tax position, and (3) whether the equipment will hold value. Run those three questions first; the contract structure follows.