Equipment Loan vs Lease: Which Is Better for Your Business?

When using equipment financing, you will typically choose between a loan and a lease. Both get you the equipment you need, but they work differently and have distinct advantages.

This guide compares equipment loans and leases to help you make the right choice for your Dallas business.

Quick Comparison

We know that scanning the details quickly matters when you are running a business. This table breaks down the core differences between the two financing paths.

Factor	Equipment Loan	Equipment Lease
Ownership	Immediate (Title in your name)	At end (Optional or never)
Upfront Cash	10-20% Down Payment	Often $0 or First & Last Month
Soft Costs	Rarely covered (you pay shipping/install)	Often 100% financed (included in payment)
Balance Sheet	Asset + Liability	Varies (Operating vs. Capital Lease)
Tax Treatment	Depreciation + Interest	Payment may be 100% deductible
End of Term	You own it outright	Return, Upgrade, or Buyout
Maintenance	Your responsibility	Your responsibility (usually)

Understanding Equipment Loans

We define an equipment loan as a straightforward borrowing arrangement where you borrow money to purchase the asset. The equipment itself serves as collateral to secure the debt.

How It Works

1. Application: You submit financial documents to a lender.
2. Funding: The lender pays the vendor directly.
3. Ownership: You take title immediately.
4. Repayment: You make fixed monthly principal and interest payments.
5. Completion: The lien is removed once the loan is paid in full.

Advantages of Equipment Loans

Immediate Ownership and Equity We see this as the primary driver for established businesses. Every payment you make increases your equity in the machine or vehicle.

Section 179 Tax Power You can often deduct the full purchase price in the first year. For 2025, the Section 179 deduction limit is approximately $1.25 million, which provides massive tax relief for profitable companies.

Total Control We find that owners who customize their gear prefer loans. You can modify, paint, or upgrade the equipment without asking a lessor for permission.

Lower Total Cost Interest rates for equipment loans in 2025 typically range from 7% to 15% for strong credit profiles. Over the life of the asset, paying cash or taking a standard loan usually costs less than a lease.

Disadvantages of Equipment Loans

Heavier Cash Requirements We often warn clients about the upfront capital needed here. Most lenders require a 10% to 20% down payment, which can tie up $10,000 or more on a $100,000 excavator.

Obsolescence Risk You carry the burden if the technology becomes outdated. If you buy a server stack that is worthless in three years, you are still stuck with it.

Strict Credit Standards We typically see banks requiring credit scores above 680 and two years of business history for the best loan rates. Startups often face steeper hurdles or higher rates.

Understanding Equipment Leases

We view leasing as paying for the use of an asset over a set period rather than paying for the asset itself. This structure prioritizes cash flow over ownership.

Types of Leases

Fair Market Value (FMV) Lease

• Best for: Technology and rapidly depreciating assets.
• Structure: Low monthly payments.
• End of Term: You can return the gear, upgrade to new models, or buy it at its current market value.

$1 Buyout Lease (Capital Lease)

• Best for: Companies that want to own the equipment eventually but need to manage cash flow now.
• Structure: Higher monthly payments than FMV.
• End of Term: You own the equipment for a nominal $1 payment.

Sale-Leaseback

• Best for: Generating immediate capital.
• Structure: You sell equipment you already own to a lessor and lease it back.
• Benefit: Converts fixed assets into working capital.

Advantages of Equipment Leases

100% Financing Including Soft Costs We consider this a major “hidden” benefit of leasing. A lease often covers shipping, installation, and software costs, whereas a loan usually only covers the hardware price.

Preservation of Working Capital Your cash stays in the bank for payroll, marketing, or emergencies. Leases rarely require a significant down payment.

Hedge Against Obsolescence We recommend this for IT equipment or medical devices. You can simply return the old unit at the end of the term and sign a new lease for the latest model.

Easier Approval Standards Lessors are often more lenient than banks regarding credit scores. Approval can sometimes happen in hours rather than weeks.

Disadvantages of Equipment Leases

Higher Long-Term Cost We always run the math for our clients to show the total expense. Leasing essentially includes a “convenience premium,” making the total output higher than a direct purchase.

Confusing Lease Accounting (ASC 842) You need to be aware of accounting rule changes. Under ASC 842, most leases longer than 12 months must now appear on your balance sheet as a liability, removing the old “off-balance sheet” advantage.

Usage Restrictions Leases often come with strict usage limits or condition requirements. You might face penalty fees if you exceed hour limits on a forklift or return a vehicle with scratches.

Side-by-Side Cost Comparison

We have broken down a real-world scenario to highlight the financial differences. Let’s look at financing $100,000 of kitchen equipment.

Equipment Loan

• Equipment Cost: $100,000
• Down Payment (20%): $20,000
• Loan Amount: $80,000
• Interest Rate: 9%
• Term: 60 Months
• Monthly Payment: ~$1,660
• Total Cost (Payments + Down): $119,600
• Asset Status: Owned

Equipment Lease (FMV)

• Equipment Cost: $100,000
• Down Payment: $0 (First & Last payments only)
• Monthly Payment: ~$1,950
• Term: 60 Months
• Residual (Buyout Cost): ~$20,000 (Estimated FMV)
• Total Cost (Payments + Buyout): $137,000
• Asset Status: Rented (unless bought)

Analysis

We see a clear trade-off in these numbers. The loan saves you roughly $17,400 in total cost, but it requires you to part with $20,000 cash on day one. The lease costs more overall but keeps your liquidity safe for other opportunities.

Tax Considerations

We strongly advise speaking with a CPA, as tax laws change annually. However, general rules apply that differentiate these two products.

Equipment Loan Tax Benefits

Section 179 & Bonus Depreciation You can generally deduct the purchase price immediately. Even though you are paying for the item over five years, the IRS often allows you to take the tax break upfront.

Interest Deductions Only the interest portion of your monthly loan payment is deductible as a business expense.

Equipment Lease Tax Benefits

Full Payment Deduction We find this simplifies accounting for many small business owners. With a true operating lease, the entire monthly payment is typically treated as a rental expense, which reduces your taxable income directly.

No Depreciation Schedules You do not have to worry about complex depreciation tables. The expense is realized as you pay it.

Decision Framework

We developed this simple checklist to help you decide.

Choose an Equipment Loan If:

• You plan to keep the asset for 5+ years. Long-term assets like ovens, shelving, or heavy machinery belong on your balance sheet.
• You have cash reserves. Your business can comfortably afford the 20% down payment without hurting operations.
• You need to lower your tax liability now. Taking a large Section 179 deduction this year is a priority for your tax strategy.

Choose an Equipment Lease If:

• The equipment is high-tech. Computers, diagnostic tools, and software become obsolete quickly.
• Cash flow is tight. You need the equipment to generate revenue but cannot afford a large upfront check.
• You need “soft costs” covered. The installation and delivery fees are significant, and you need them included in the financing.

Industry Examples

Construction: Usually Loan

We typically finance yellow iron (excavators, bulldozers) via loans. These machines hold value for a decade, and owners often need to weld or modify them for specific jobs.

Restaurants: Mixed Approach

Your walk-in cooler and ovens are long-term assets suitable for loans. However, point-of-sale (POS) systems and dishwashers are often leased because they wear out or require technology updates.

Medical & Dental: Usually Lease

We see many practices lease their imaging and laser equipment. Medical tech advances so fast that owning a five-year-old MRI machine can become a liability.

The Bottom Line

We know that there is no single “best” option for every business. The right choice depends entirely on your cash position, your tax strategy, and how long you plan to use the equipment.

Many businesses use both. You might take a loan for your core machinery while leasing your IT infrastructure.

Ready to explore your options? Equipment Financing Dallas Pros offers both loan and lease solutions tailored to your needs.