When a business needs equipment, two paths dominate: buy it with financing or lease it. Both are legitimate strategies, and the right choice depends on your specific situation — not a generic rule.
Here's how to think through it.
What Is Equipment Financing?
Equipment financing is a loan where the equipment itself serves as collateral. You borrow to purchase the equipment, make monthly payments over the loan term, and own it outright at the end.
Key features:
- Loan-to-value: typically 80–100% of equipment cost
- Terms: 24–84 months depending on equipment life
- Rates: 6–25% depending on credit, equipment type, and term
- Ownership: you own the equipment from day one
- Tax treatment: depreciation (Section 179 and bonus depreciation available)
Equipment financing makes the most sense when the equipment will retain value, you plan to use it for most of its useful life, and you want to build equity in the asset.
What Is Equipment Leasing?
Equipment leasing is effectively renting equipment from a leasing company. You make monthly payments for a set term, and at the end you either return the equipment, renew the lease, or purchase it (depending on the lease type).
Key features:
- No down payment in most cases
- Monthly payments are typically lower than financing
- No ownership — you're paying for use, not equity
- Tax treatment: lease payments are generally fully deductible as operating expenses
- At end of term: return, renew, or purchase (at fair market value or a predetermined price)
Two main types of leases:
- Operating lease (true lease): Short-term, equipment returns at end, off-balance-sheet treatment
- Finance lease (capital lease): Longer-term, resembles financing, on-balance-sheet
Side-by-Side Comparison
| Equipment Financing | Equipment Leasing | |
|---|---|---|
| Ownership | Yes, immediately | No (unless you exercise purchase option) |
| Monthly payment | Higher | Lower |
| Total cost | Lower (long-term) | Higher (long-term) |
| Down payment | Often required (10–20%) | Usually none |
| Obsolescence risk | You bear it | Lessor bears it |
| Balance sheet | Asset + liability | Depends on lease type |
| Best for | Equipment with long useful life | Technology, rapidly changing equipment |
When Financing Wins
Choose equipment financing when:
- The equipment has a long useful life (10+ years) — trucks, trailers, machinery, medical equipment
- You'll use the equipment beyond the loan term
- The equipment holds or appreciates in value
- You want to build business assets on your balance sheet
- Section 179 deductions are important to your tax strategy
When Leasing Wins
Choose leasing when:
- The equipment becomes obsolete quickly — computers, copiers, software
- You need to preserve cash and working capital
- You want predictable operating expenses without ownership liability
- Your business model involves cycling equipment frequently
- You're unsure how long you'll need the equipment
The True Cost Calculation
Don't compare monthly payments — compare total cost of ownership over the full useful life.
Example: $80,000 piece of manufacturing equipment, 5-year useful life
Financing at 8%, 60 months:
- Monthly payment: ~$1,622
- Total paid: ~$97,300
- Residual value at year 5: ~$20,000
- Net cost: ~$77,300
Operating lease at $1,300/month:
- Total paid over 5 years: $78,000
- Residual value at year 5: $0 (unless you exercise purchase option)
- Net cost: ~$78,000
In this example, they're roughly equivalent — but if you use the equipment for year 6 and 7, financing wins by a wide margin.
What About Section 179?
Section 179 of the tax code allows businesses to immediately deduct the full purchase price of qualifying equipment in the year it's placed in service, rather than depreciating it over time. For 2025, the deduction limit is $1,220,000.
This can significantly change the after-tax economics of financing vs. leasing. Consult your accountant before making the decision.
The right choice depends on how long you'll use the equipment, your tax situation, and how much cash flow flexibility you need. Run the full-term numbers — not just the monthly payment.