The Major Difference

Equipment Lease vs. Finance

Equipment leasing and equipment finance are two different ways to acquire equipment. Both give you immediate access to expensive equipment, but they’re structured in different ways. The primary difference has to do with ownership.

Equipment Lease

With equipment leasing you don’t own the equipment outright. Rather, a lender buys a piece of equipment from a vendor, and then rents it out to you for a monthly payment. At the end of your lease, you can choose to purchase the equipment, renew your lease, or return the equipment.

There are two main types of equipment leases: operating lease and capital leases Here’s how they differ:

Operating leases – This type of lease has low monthly payments and gives the business owner the option to own the equipment at the end of the lease term by paying its then-fair market value. Another name of operating lease is fair market value lease.
Capital leases – This type of lease has higher monthly payments and is structured more like a loan. The difference is that the lease doesn’t appear on your balance sheet during the term of the lease. At the end of the lease, the business owner has the option to buy the equipment for a nominal price, like $1 or 10% of the purchase price. The $1 buyout lease and FMV 10% - 30% option lease are popular examples.

The size of your monthly payments and the benefits and drawbacks of equipment lease vs. finance will depend to a large extent on what type of equipment lease you have. Some capital leases are virtually indistinguishable from equipment finance.

Equipment Finance

If you opt for equipment financing also called an equipment loan, your lender will front you the capital to pay for the purchase of a piece of equipment. Depending on what you’re buying, your equipment financing company can loan you all, or most, of the total value of your equipment. You’ll pay down your loan, plus interest, over time. Once you’ve repaid your loan according to its terms, you’ll fully own your equipment.

All told, an equipment lease lets you pay for the use of equipment for as long as the lease lasts, not necessarily for the ownership of that equipment. An equipment loan helps you pay for a piece of equipment outright. Like any other small business loan, though, you’ll need to repay your lender what you’ve borrowed, as well as interest. You can kind of think of an equipment lease as renting out an apartment, and an equipment loan as buying a house.