equipment leasing vs. equipment financing

Equipment Leasing vs. Equipment Financing

10 min read • Feb 11, 2022 • Lendio

Should you lease new equipment or buy new equipment? That’s an essential question for almost any business, particularly in the construction industry.

One of the ways construction firms can gain a significant advantage over competitors is by using heavy equipment and machinery that allows the business to either do more, work faster, or even add a service or specialty. However, acquiring the necessary equipment requires a significant cash outflow, which the company may not already have.

Instead of using cash to buy the equipment outright, construction firms have 2 other options for acquiring equipment: equipment leasing and equipment financing. Deciding which is right for your business involves several considerations:

  • Type of equipment to be acquired
  • How often the equipment will be used
  • Maintenance and repair costs
  • Resale value of the equipment

Here’s how to determine which is better for you. 

Difference Between Equipment Leasing and Equipment Financing

Equipment leasing and equipment financing are 2 major ways to acquire equipment, but they are structured differently. 

Equipment leasing is a long-term rental agreement. A piece of equipment is purchased by a lender and rented to the construction business for a specific period of time. In return, the construction business pays the lender a monthly fee for the duration of the rental agreement, a.k.a., lease, and can use the equipment as if it were their own. When the lease ends, the equipment is returned to the lender, although the construction business usually an option to renew the lease or purchase the equipment. Lease payments usually remain consistent throughout the lease term and there is no additional interest charge, although any interest that might be associated with the lender’s cost of the equipment is factored into the monthly payment. A monthly lease payment may also be lower than an equivalent loan.

Equipment financing or an equipment loan, on the other hand, refers to borrowing money to purchase a piece of equipment. The financing firm can lend most if not the entire cost of the equipment. In exchange, the construction business pays a portion of the purchase price (usually each month) along with interest and other fees, depending on the terms of the loan, until the entire purchase price has been paid. At that time, the equipment is owned in full by the construction business. Monthly payments may be slightly higher for an equipment loan than for an equipment lease, but when the loan is paid off, the the equipment belongs to the construction business.

Equipment lease:Equipment loan:
Monthly flat-fee rental costPay a portion of the purchase price plus interest monthly
May have a lower monthly paymentMonthly payment may be higher than a lease payment
At end of lease, equipment is owned by lenderAfter the final payment is made, the equipment is owned outright by the construction business

Equipment Leasing Pros and Cons

Some pieces of equipment risk becoming outdated. If you are considering using a piece of equipment that is in danger of being obsolete in the future, an equipment lease may be a better option than a loan. Since you do not own the equipment, you will not shoulder that risk. In addition, lease periods are usually between 2 years and 7 years, which will usually not outlast the equipment’s useful life. 

Equipment leasing often has a lower impact on cash flow. Leasing spreads payments over the duration of the lease, allowing your business’s cash to be used for other opportunities like paying expenses or funding your growth. Also, the lease doesn’t attempt to reclaim the full purchase price for the equipment during the initial lease period — monthly payments are a rental or usage fee — since after the lease ends, the lender will still own the equipment.

However, the disadvantage of choosing to leasing equipment is that the equipment is still owned by the lender. Additionally, not all equipment is available for leasing: choice may become a deciding factor for some construction firms.

Advantages of an equipment lease:Disadvantages of an equipment lease:
Lower impact on cash flowEquipment is owned by lender
Good for short-term equipment needsPayments are an expense not tied to the eventual ownership of asset
Good for equipment in danger of becoming obsolete Equipment may be limited.

Equipment Financing Pros and Cons

If you are considering using a piece of equipment that you know is durable and will last a long time, your best option is equipment financing. The terms of the loan depend on the type of equipment you need, and usually, the lender will front around 80% to 100% of its entire cost. The qualification process is easier since the equipment itself will serve as collateral. 

One of the downsides of an equipment loan is the required initial down payment, which can be a challenge if you are having cash flow issues. In addition, you have the full ownership of the equipment so you will assume the risk of owning obsolete equipment in the future. This risk is why it is advised only to get an equipment loan when you know the piece of equipment will last a long time. 

The decision of whether to lease or finance your equipment acquisition depends entirely on your business situation. Before deciding which course of action to take, evaluate your business goals and choose which method aligns with your objectives.

Advantages of an equipment loan:Disadvantages of an equipment loan:
Construction business has full ownership of equipmentDown payment required
Equipment has resale valueBigger impact on cash flow
Choice of equipment not limitedRisk of equipment being obsolete is shifted to construction business

Equipment Leasing vs. Equipment Financing: Which is Right for You?

Your decision to lease construction equipment vs. finance construction equipment involves several considerations including the type of equipment you’re considering, how often you’ll use it, the cost of maintenance, the projected ROI, the resale value and, of course, what you can afford (our equipment loan calculator can help with this). But these general rules will hold true across the board:

  • Lease: if you’re considering a piece of equipment in danger of becoming obsolete
  • Finance: If the equipment is integral and a long-term part of your operation
  • Lease: If immediate cash flow is a concern, leasing may be more affordable
  • Finance: If investment, resale, and ROI are important, an equipment loan is a better fit

You may also use this guide for more information about leasing vs. financing for your construction business.

Equipment Leasing vs. Financing FAQs

Is it cheaper to lease or buy equipment?

While all leases and loans are different, usually leasing results in a lower monthly payment because the ownership of the equipment is retained by the lender. However, in the long-term, leasing can be more expensive if the equipment is needed after the lease ends. Also, the construction business can’t resell leased equipment. Buying the equipment through a loan gives the small business owner / construction business the ability to recoup loan payments by reselling the equipment—so there’s a positive return on the construction business’s investment.

What are equipment leasing and financing?

Equipment leasing and equipment financing are two ways to acquire new equipment for construction businesses. Equipment leasing means you’re “renting” the equipment but the ownership of the equipment stays with the lender. Equipment financing means you’re paying a portion of the purchase price of the equipment monthly (plus interest) and, but once all payments are made, you’ll own the equipment. 

Should I lease or finance equipment?

Whether it’s better for your construction business to lease equipment vs. finance equipment depends on your unique situation, including your long-term plans and your short-term cash flow. Leasing tends to result in lower monthly payments but is seen solely as an expense since the equipment is still owned by the lender. Equipment financing results in ownership of the equipment, which can then be used long-term or resold.

What is the interest rate on equipment lease?

Equipment leases do not have an additional interest rate; instead, construction firms pay a set monthly fee to use the equipment for a set period of time (any interest that might be associated with the lender’s cost of the equipment will be incorporated factored into the monthly payment). Equipment loans and financing, on the other hand, have interest rates that are determined by a number of factors. As of February 2022, the range was 6–15%, although there can be some variation.

Do equipment leases have interest?

All leases will be structured differently, but you won’t see an “interest” line item on an equipment leases. Instead, any interest that might be associated with the lender’s cost of the equipment will be incorporated into and part of the monthly payment.

Disclaimer: The information provided in this post does not, and is not intended to, constitute business, legal, tax, or accounting advice and is provided for general informational purposes only. Readers should contact their attorney, business advisor, or tax advisor to obtain advice on any particular matter.

Lendio

Lendio's team of experts is here to help you with every nook and cranny of your business. We'll make sure you have the best advice for financing, operations, management, hiring, and much more.