What You Need to Know About Business Equipment Financing and Leasing
Whether you're a wholesaler that needs a fleet of vehicles to distribute goods or a doctor's office that relies on the latest imaging technology to help patients, getting the right equipment is important to the success of your business. If you don't have the immediate funds to make the purchase, you have two choices to consider: business equipment financing and business equipment leasing.
Both options have advantages and disadvantages. If you're a business owner, it's important to understand how they work and how they impact your business.
Equipment financing vs. leasing
Financing involves taking out a loan to purchase a piece of equipment. Rates can vary depending on the type of equipment a business needs to purchase and the owner's credit history. And in a financing arrangement, the equipment often serves as collateral.
Similar to leasing a car, equipment leasing allows business owners to rent equipment from a leasing company for a period of time with a set monthly payment. In this arrangement, you don't own the equipment—you simply pay for its use. At the end of the lease, the business owners can return the equipment, purchase it or renew the lease.
Should I finance or lease equipment?
Business equipment financing can be a good choice if you plan on keeping the piece of equipment for a long time. Purchasing equipment gives your business a new asset, which can be helpful if you want to apply for a loan or line of credit in the future. And at the end of your loan, you own the equipment outright. In addition, financing often costs less in the long run, as lease arrangements are almost always more expensive than purchasing.
Lease arrangements allow you to use your cash in other areas of your business, as payments are often lower than financing. Another benefit is that leasing lets you acquire the newest equipment, so you can stay up to date on the technology and trends in your industry.
Business owners often choose a lease when they don't plan to keep the equipment long-term. Lease terms typically last between 24 and 72 months. Leasing allows you to try it out and decide if you want to commit funds to its purchase. And with leases, you don't have to worry about selling or disposing of old equipment when it's no longer of use.
According to Section 179 of the IRS Tax Code, equipment leasing and financing may both offer tax incentives. Capital lease payments are deductible as regular business expenses. If you finance the purchase, you can deduct 100% of the cost of the equipment up to $1 million. Previously, business owners had to divide and amortize the purchase price over the expected lifetime of the asset.
Whether you decide to lease or finance, make sure you research and understand the details of the arrangement before bringing that new piece of technology into your business. Choosing the best option will help you maximize your cash flow and realize your long-term business goals so you can grow and thrive in the future.
Financial insights for your business
This information is provided for educational purposes only and should not be relied on or interpreted as accounting, financial planning, investment, legal or tax advice. First Citizens Bank (or its affiliates) neither endorses nor guarantees this information, and encourages you to consult a professional for advice applicable to your specific situation.