In This Article
The Core Difference
Equipment financing (a loan) gives you ownership from day one — you're borrowing money to buy the equipment, and once the loan is repaid, the equipment is yours free and clear. Equipment leasing lets you use the equipment for a set period in exchange for monthly payments, with options at the end of the lease term. The right choice depends on how long you'll use the equipment, your tax situation, your cash flow, and how quickly the equipment will depreciate.
Types of Equipment Leases
A Capital Lease (also called a $1 buyout or finance lease) is essentially a loan disguised as a lease — you'll own the equipment at the end for a nominal fee. A Fair Market Value (FMV) Lease lets you return the equipment, renew the lease, or purchase at fair market value at the end. A TRAC Lease (Terminal Rental Adjustment Clause) is specific to vehicles and lets you set an expected residual value upfront. Each has different accounting, tax, and cash flow implications.
Tax Implications
With financing, you own the equipment and can claim depreciation (including Section 179 and bonus depreciation for a potential first-year write-off of the full purchase price). With a true operating lease (FMV), lease payments are typically fully deductible as a business expense but you can't depreciate the asset. Capital leases are treated similarly to purchases for tax purposes. The Tax Cuts and Jobs Act made 100% bonus depreciation available through 2026, which significantly favors purchasing or capital leases for many businesses.
When to Lease vs. When to Finance
Lease when: the equipment becomes obsolete quickly (technology), you want to preserve cash for other investments, you need to upgrade frequently, or you want lower monthly payments. Finance when: you'll use the equipment for its full useful life, you want to build equity, you want to take advantage of Section 179 depreciation, or the equipment holds its value well (like trucks and heavy equipment). For most trucking and heavy equipment purchases, financing is typically the better long-term financial decision.
Pros & Cons
Pros
- Financing builds equity and ownership
- Leasing preserves cash and provides flexibility
- Both offer tax advantages (different types)
- Section 179 benefits purchasing/capital leases
- Leasing allows easier technology upgrades
Cons
- Financing ties up capital in the asset
- Leasing costs more over the total term
- FMV leases don't build equity
- Capital leases are more complex to account for
- Early termination of leases can be costly
Key Terms to Know
Best For
- Anyone deciding between renting and owning business equipment
- Tax-conscious business owners
- Companies evaluating total cost of ownership
- Fleet operators comparing fleet management strategies
Equipment Leasing vs. Financing vs. Bank Equipment Financing
How do these two options compare?
Leasing offers lower monthly payments and flexibility to upgrade, while bank financing provides ownership and Section 179 tax deductions. Leasing costs more over the full term but preserves cash. Bank loans build equity from day one at rates of 5-12%. For long-use equipment like trucks, financing wins; for rapidly depreciating tech, leasing wins.
Read about Bank Equipment Financing