You need equipment to run your business. The question is whether to lease it or buy it. Both options let you get the equipment now and pay over time. But the way they work, what they cost, and who owns the equipment at the end are very different.
This guide breaks down both paths with real numbers. By the end, you will know which option makes sense for your situation. If you are new to equipment financing in general, start with our overview first.
Leasing: How It Works
When you lease equipment, you pay a monthly fee to use it for a set period. The leasing company owns the equipment. You get to use it. At the end of the lease, you return it, renew, or buy it depending on your contract.
Lease payments are usually lower than loan payments because you are not paying off the full value of the equipment. You are paying for the right to use it during the lease term.
How a lease works: You pick the equipment, the leasing company buys it from the vendor, and you make fixed monthly payments. At the end of the term, your options depend on your contract type. You might return it, buy it at fair market value, or buy it for $1.
Leasing works well for equipment that loses value fast or needs to be replaced every few years. Think computers, medical devices, POS systems, and aesthetic lasers. If next year's model makes this year's obsolete, leasing keeps you current without eating a big loss on the old equipment.
Lease Contract Types
Not all leases are the same. The contract type you choose changes your monthly payment, your end-of-term options, and how the lease shows up on your books. Here are the four main types.
EFA (Equipment Finance Agreement)
This is the most common structure. You make fixed monthly payments. At the end, you own the equipment outright. It works like a car loan. The lender has a lien on the equipment until you finish paying.
Best for: Equipment you plan to keep for a long time. You get ownership at the end without any extra purchase payment.
$1 Buyout Lease
Almost the same as an EFA. You make monthly payments and buy the equipment at the end for $1. The main difference is how it shows on your financial statements. Some businesses and their accountants prefer this structure for bookkeeping reasons.
Best for: Same use case as an EFA. Choose this if your accountant recommends it for your specific tax or reporting situation.
FMV (Fair Market Value) Lease
Your payments are lower because you are not paying off the full cost. At the end of the lease, you can return the equipment, renew the lease, or buy it at whatever it is worth at that point (the fair market value).
Best for: Equipment you plan to upgrade every 2 to 3 years. Technology, medical devices, and anything that improves quickly.
TRL (Terminal Rental Lease)
Similar to an FMV lease. At the end of the term, you have the option to purchase the equipment at fair market value. The difference is in how the residual value is calculated and the specific terms of the purchase option.
Best for: Businesses that want flexibility at the end of the term but may want to keep the equipment if it still works well.
Key Takeaway
The contract type determines what happens when your payments end.
- EFA or $1 Buyout: You own it at the end. Higher payments.
- FMV or TRL: You choose to return, renew, or buy. Lower payments.
Buying: How It Works
When you buy equipment with financing, a lender pays the vendor and you repay the lender with fixed monthly payments. Once you make the final payment, the equipment is yours free and clear.
Equipment loans use the equipment itself as collateral. This is a big advantage. Because the lender can take the equipment back if you stop paying, they offer lower rates and longer terms than unsecured business loans.
Current rates and terms: Equipment loan rates start as low as 6.99% with terms up to 72 months for strong credit profiles. Credit requirements start at 550 for alternative programs and 600+ for conventional financing.
Buying makes the most sense for equipment that holds its value, that you plan to use for many years, and that does not need frequent upgrades. Construction machinery, manufacturing equipment, trucks, and commercial ovens are common examples. These assets last a long time and some even appreciate in value.
The monthly payment on an equipment loan is usually higher than a lease payment for the same equipment. But you end up with full ownership. No more payments, no restrictions, and you can sell the equipment whenever you want.
Side-by-Side Comparison
Here is how leasing and buying stack up across the factors that matter most.
| Factor | Leasing | Buying |
|---|---|---|
| Ownership | Leasing company owns it. Purchase option may exist at end of term. | You own it after final payment. |
| Monthly payment | Lower (you pay for use, not full value) | Higher (you pay off the full cost) |
| Total cost over time | Can be higher if you keep renewing | Usually lower for long-term use |
| Down payment | Usually first and last month payment | 0-10% typical. Some programs offer zero down. |
| Upgrade flexibility | Easy. Return at end of lease and get new equipment. | Harder. Must sell or trade in old equipment. |
| Tax treatment | Deduct lease payments as business expense. | Deduct interest + depreciation. Section 179 deduction available. |
| Balance sheet impact | Under ASC 842, both lease types appear on the balance sheet as right-of-use assets, but operating leases use straight-line expense recognition vs front-loaded costs for finance leases. | Shows as both an asset and a liability. |
| Maintenance and repairs | Depends on contract - some include maintenance, most don't. Always confirm before signing. | Your responsibility - budget for ongoing costs. |
| End of term | Return, renew, or buy (depends on contract). | Equipment is yours. No more payments. |
When to Lease
Leasing is the better choice in several clear situations.
The equipment loses value fast. Computers, POS systems, and some medical devices become outdated in 2 to 3 years. Leasing lets you return the old equipment and get the latest version without taking a loss on the sale.
You want to preserve cash flow. Lower monthly payments mean more cash available for payroll, inventory, marketing, and other day-to-day expenses. If your business is growing and you need every dollar working, leasing frees up more of your budget.
You are not sure how long you will need it. Starting a new service line or testing a new piece of equipment? A lease lets you try it without committing to full ownership. If it does not work out, you return it at the end of the term.
You want to keep your balance sheet lighter. Operating leases can stay off your balance sheet, which may matter if you are applying for other types of financing and want to keep your debt-to-equity ratio clean.
Pro Tip: If you lease, pay attention to the end-of-term purchase option. An FMV lease with a low residual can turn into a good deal if you decide to buy. Get the purchase option price in writing before you sign.
When to Buy
Buying is the better choice when the math favors long-term ownership.
The equipment holds its value. Excavators, commercial ovens, CNC machines, and trucks retain value for years. When you buy, you build equity in an asset you can eventually sell or use as collateral for other financing.
You plan to use it for 5 or more years. The longer you keep the equipment, the more buying saves you compared to leasing. After you pay off a 60-month equipment loan, you own the asset free and clear. With a lease, you would be starting a new contract and making payments all over again.
You want the Section 179 tax deduction. When you buy equipment (including with financing), you can deduct the full purchase price in the year you buy it under Section 179. This can reduce your tax bill by thousands of dollars. More on this below.
You want full control. When you own equipment, you can modify it, sell it, or use it however you want. Leased equipment often comes with restrictions on modifications and usage.
Pro Tip: Many businesses use a mix of both strategies. They buy equipment that lasts 5+ years (excavators, ovens, trucks) and lease equipment they will replace within 2 to 3 years (computers, POS systems, aesthetic lasers). There is no rule that says you must pick one approach for everything.
Tax Angle: Section 179
Section 179 of the IRS tax code lets you deduct the full purchase price of qualifying equipment in the year you buy it. Instead of spreading the write-off over 5 to 7 years through depreciation, you take the full amount in year one.
For 2026, the deduction limit is over $1 million. That means most small and mid-size businesses can write off their entire equipment purchase in the year they buy it.
Here is the key part: Section 179 applies whether you pay cash or finance the equipment. You can finance 100% of the cost, start using the equipment right away, and still take the full deduction. That is a major advantage of buying over leasing.
Leased equipment has a different tax treatment. You deduct your lease payments as a business expense each year. This is simpler but usually results in a smaller first-year tax benefit compared to Section 179.
Important: Section 179 rules change periodically. Deduction limits, phase-out thresholds, and qualifying equipment types can shift from year to year. Always talk to your CPA or tax advisor before making equipment purchase decisions based on tax benefits. The information here is for general guidance only.
Real Cost Scenario: $100K Equipment
Let us compare the actual cost of leasing vs buying a $100,000 piece of equipment. We will look at a 5-year timeline so you can see how the total cost plays out under each option.
Scenario: Buying with an Equipment Loan
| Item | Amount |
|---|---|
| Equipment cost | $100,000 |
| Rate | 8% (strong credit) |
| Term | 60 months |
| Monthly payment | $2,028 |
| Total paid over 5 years | $121,680 |
| Equipment value after 5 years | ~$40,000 (estimated residual) |
| Net cost (total paid minus residual) | $81,680 |
Scenario: Leasing with an FMV Lease
| Item | Amount |
|---|---|
| Equipment cost | $100,000 |
| Lease term | 36 months (typical FMV lease) |
| Monthly payment | $2,900 (estimated) |
| Total paid over 3 years | $104,400 |
| Second lease for remaining 2 years (new equipment) | ~$69,600 (estimated) |
| Total paid over 5 years | ~$174,000 |
| Equipment owned at end | Nothing (unless you buy out) |
Over 5 years, buying cost $81,680 net (after accounting for the equipment's residual value). Leasing cost around $174,000 with two lease cycles and you own nothing at the end.
But look at the monthly payment. The lease payment is higher per month in this scenario because it is a shorter term. Where leasing wins is when you factor in lower monthly payments on longer FMV leases and the ability to always have current equipment.
Key Takeaway
Buying almost always costs less over 5+ years for equipment that holds its value. Leasing costs less per month and gives you upgrade flexibility.
- Buy when you need the equipment long-term and value matters
- Lease when you need to stay current and cash flow is tight
- The right answer depends on YOUR equipment, YOUR budget, and YOUR timeline
Frequently Asked Questions
Is it better to buy or lease equipment?
It depends on how long you plan to use the equipment and whether it holds its value. Buy if you will use it for 5 or more years and it holds value well. Lease if you need to upgrade every 2 to 3 years or want lower monthly payments. Many businesses do both depending on the equipment type.
What are the disadvantages of leasing equipment?
You do not own the equipment at the end of the lease unless you exercise a purchase option. Over time, leasing the same equipment repeatedly can cost more than buying it outright. You may also face early termination fees if you need to end the lease early.
What is the 90% rule in leasing?
The 90% rule says that if the present value of lease payments equals 90% or more of the equipment's fair market value, it is treated as a capital lease (finance lease) for accounting purposes. This means it shows up as an asset and a liability on your balance sheet, similar to buying.
What is the 75% rule for finance leases?
The 75% rule says that if a lease term covers 75% or more of the equipment's useful life, it qualifies as a finance lease for accounting purposes. For example, if a machine has a 10-year useful life and you lease it for 8 years, it would be classified as a finance lease.
Can I finance used equipment?
Yes. Most equipment financing programs cover both new and used equipment. The equipment itself serves as collateral, which keeps rates lower than unsecured loans. Used equipment may come with slightly shorter terms or higher rates, but it is absolutely eligible.
What credit score do I need for equipment financing?
Credit requirements start as low as 550 for alternative programs. Conventional equipment financing typically requires 600 or higher. The best rates, as low as 6.99%, go to borrowers with 620 or higher credit scores. Terms up to 72 months are available for strong credit profiles.
Not Sure Which Is Right? We'll Help You Decide.
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