Leasing vs Purchasing Equipment for Businesses

Q: Is leasing or buying heavy equipment better?

It depends on what you’re buying, how long it will last/be useful to you, and how much cash you have on hand. Leasing has financial benefits, such as lower payments and not being saddled with an outdated piece of equipment. Buying, on the other hand, may be more affordable in the long run, and you’ll own an asset you can then sell.

Q: For tax purposes, is it better to lease or buy business equipment?

Both have tax benefits. When you purchase equipment, you can typically write off the cost of that equipment over time (known as depreciation). If you finance an equipment purchase, the interest you pay on that loan can usually be deducted as a business expense. And, if you lease, you may be able to deduct your lease payments as a business expense. Which works out better will depend on the type of business you have, which state you live in, and current tax laws. When weighing how leasing vs. purchasing equipment will affect your taxes, it’s a good idea to consult a tax professional.

Q: How is purchasing different from leasing equipment?

When you buy equipment, you own it. If you take out a loan to buy it, you may need to pay a certain amount up front, then make monthly payments that include interest. If you pay cash in full, you own the equipment right away. When you lease equipment, you do not have ownership of the asset. Instead, you pay a monthly fee to use it for a certain period of time. With leasing, you may also need to make a down payment. When the lease is up, you return the equipment, though in some cases, you may have the option to purchase it.

Leasing vs Purchasing Equipment for Businesses

Lauren WardUpdated August 25, 2022

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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.

When you’re starting a business, it can be tempting to lease rather than buy any expensive office or warehouse equipment you need in order to conserve cash flow. However, this may or may not be your best option.Whether it’s better to buy or lease equipment for your business will depend on a number of factors, including your cash reserves, the type of equipment you need, whether that equipment will hold its value over time, and how long you plan to have the item in service.Read on to get all the pros and cons of leasing vs buying equipment, tools, computers, and vehicles for your company.

Leasing vs Buying Equipment

Leasing business equipment can help preserve capital and provide flexibility, which can be important when you are starting a small business. However, leasing could end up costing you more in the long run. Let’s break it down and compare.

Leasing Equipment	Buying Equipment
Keeps cash on hand	If equipment holds its value over time, buying can save you money in the long run
Expenses may be tax deductible	Costs may be tax deductible
Equipment is always new and up to date	You can end up owning old or outdated equipment
You may be obligated to make payments for the entire lease period even if you stop using the equipment	Can sell the equipment when you’re done with it
Can’t modify or change the equipment in any way	Can modify the equipment to meet your needs
May get free repairs	Must pay for any maintenance costs out of pocket

Pros and Cons of Leasing Equipment

Leasing equipment has a number of advantages over purchasing. Here are some to consider.

Down payments are usually lower than financing (and sometimes no down payment is required)
Terms are often flexible (e.g., can buy out lease)
Allows you to test out equipment before you commit to it
Maintenance and repair costs are usually free
Monthly lease payments may be tax deductible
Can be easier to get than a loan if you don’t have good credit
Easier to upgrade after your lease expires

But there are also a number of downsides to leasing vs buying equipment. These include:

You don’t own the item while leasing it
Will likely have a higher overall cost
Depreciation is not tax deductible
You’re obligated to stick with the lease even if you no longer need/use the equipment
Termination fees for breaking the lease contract

Pros and Cons of Purchasing Equipment

There are also advantages and disadvantages of buying equipment. Here’s a look at some of the benefits of purchasing business equipment:

You own the equipment
Lifetime cost is usually less than leasing
Counts as an asset on your balance sheet
Can likely claim depreciation on your taxes
Free to use equipment however you choose
Can sell the equipment after using it

Purchasing equipment also has some disadvantages. Here are some to consider:

Need more cash or credit up front
Can’t always test out the equipment before purchasing
You are liable for maintenance and replacements
May get stuck with old and outdated equipment
If you finance it, will Increase liabilities on the balance sheet, which could prevent you from borrowing more money

Recommended: Equipment Financing: What It Is and Tips for Applying

What Types of Business Equipment Can You Lease?

Just about any type of equipment that is pivotal to a business’s operation can be leased. This includes, but is not limited to:

Audio equipment
Communication equipment
Company vehicles
Computer hardware
Computer software
Construction equipment
Digital signage
Fitness equipment
HVAC systems
Lighting systems
Manufacturing equipment
Medical equipment
Office furniture
Office equipment
Copiers and printers
Fax machines/scanners
Point-of-sale systems
Security systems
Call center systems
Wireless point-to-point systems
Video surveillance
Warehouse equipment

Pros and Cons of Leasing Computers

Whether business owners should lease vs. buy computers is a decision that ultimately comes down to the following pros and cons:

Pros of Leasing Computers	Cons of Leasing Computers
Fixed monthly payments that are easy to budget for	Can end up being more expensive over time that purchasing computers outright
Hardware will always be up to date	Depending on the company, the leasing agreement may come with complicated terms — including what you can and cannot install on the computer
Depending on the leasing agreement, fixes and repairs may be taken care of for free by a certified technician	There may be penalties involved if the lease agreement is terminated early

The biggest argument in favor of computer leasing for small business owners may be that the hardware is always up-to-date. A lease may allow you to stay current on the latest technology without having to re-purchase every couple of years. This can help small businesses keep up with the technological curve.If your tech needs are modest, however, and you can comfortably use the same gear for longer than five years, it may make more sense to simply buy the equipment you need.

Pros and Cons of Leasing Business Vehicles

To lease vs. purchase a business vehicle is also a debate for many business owners. When making that decision, it can help to consider the following:

Pros of Leasing Business Vehicles	Cons of Leasing Business Vehicles
Down payments for leased cars may be lower than for purchased cars	You're not building up any equity in the vehicle with your monthly payments
Monthly lease payments are typically lower than monthly auto loan payments	Can't sell the car or trade it in to reduce the cost of your next vehicle
Your car will always be new	Normally cannot make any modifications to the car
Repairs and maintenance may be covered	Must have a strong credit score to get a good leasing agreement
May afford you more tax write-offs than a loan	Have to pay certain fees that don’t come with a loan (such as an acquisition fee)
You’ll never owe more than the actual value of the car	Penalties for exiting a leasing agreement can be high

Leasing a car can have many advantages for business owners, including a potentially higher write-off on your taxes and lower monthly costs. In terms of the long-term financial impact, however, leases can be less attractive. Since you don’t build equity and typically have to pay fees that don’t come with a loan (such as an acquisition, or lease initiation, fee), it could be cheaper overall to buy a car and hold onto it for as long as possible. Vehicle refinancing can provide relief down the road.Buying can also make sense if you plan to do any customization to the car, since altering the car is not typically allowed with a lease.If you think buying might be the way to go but want to conserve capital, you may want to look into getting a small business auto loan, which is a type of financing tailored specifically for business owners.

Pros and Cons of Leasing Warehouse Equipment

Unlike computers, warehouse equipment tends to age pretty well, so there’s a lot to consider when deciding whether to purchase vs lease your warehouse equipment.

Pros of Leasing Warehouse Equipment	Cons of Leasing Warehouse Equipment
Little upfront cost, if any	You can end up spending more in the long run than if you had purchased the equipment
At the end of your leasing agreement, you may be able to purchase the equipment, return it, or re-lease it	Warehouse equipment typically depreciates very little year to year, which makes financing equipment fairly low risk
May come with free repairs	Can’t sell the equipment
Agreement may allow you to trade up	Fines for breaking leasing agreement

To make a decision about whether to lease or buy warehouse equipment, you may want to consider how long you are going to need it. If the asset is something you know you’re going to need for the next decade or so, paying cash or financing the purchase could make more sense than leasing.

What to Consider When Choosing Whether to Lease or Buy

If you’re unsure whether it’s better to lease or buy business equipment, asking yourself the following questions may help sway your decision.

How Much Cash Do You Have?

If you have extra capital sitting around and a strong cash flow, buying may be a better option than leasing. Paying for the item outright avoids having to get financing or enter into a lease agreement.If, on the other hand, cash is somewhat tight, it could be better to lease the equipment, since this will allow you to keep what cash you have free for any unexpected expenses.

What Will the Equipment Be Used For?

Think about how you plan to use the equipment, and whether it will be for the short or long term. Certain assets wear out as you use them, while others can become outdated over time. If the equipment is likely to be useful and functional for many years, you might be better off purchasing it. If, on the other hand, it’s likely to wear out or become outdated quickly, it could be wiser to lease.

Is Handling Equipment Maintenance Doable?

When you lease equipment, you typically don’t have to worry about maintenance and repairs, since this is usually covered by the leasing company. When you buy equipment, this becomes your responsibility. When weighing whether to lease or buy, it can be a good idea to research the potential cost of maintaining the equipment and then consider whether or not you would be able to handle those expenses.

Is Your Business Structured for Growth?

Part of the decision over leasing vs. buying comes down to whether you’re primarily focused on business growth or on profits. If your focus is growth, you may want to hold on to your capital and lease. You can then put this cash toward other assets that can help you grow your business. If you're looking to quickly increase profits, purchasing equipment may be the better route. Owning assets can lower your operating costs and increase the overall value of your company.

Leasing vs Financing Business Equipment

Equipment leasing and equipment financing are two ways to acquire business equipment without paying for it in full at the outset. However, these two options are structured differently. Equipment leasing is a long-term rental agreement. You pay the leasing company a monthly fee for the duration of the lease agreement, and have full use of the asset during that time. At the end of the lease, you return the equipment. You may also have the option to renew the lease or purchase the equipment at that time. A monthly lease payment may be lower than a monthly loan payment for the same asset.Equipment financing or an equipment loan, on the other hand, involves borrowing money to purchase a piece of equipment. The lender offers up to 100% of the purchase price. The business then pays the lender a portion of the purchase price (plus interest) each month until it is fully paid off. Once the loan is paid in full, the business owns the equipment. While monthly payments may be slightly higher for an equipment loan than for an equipment lease, at the end of the loan term, the business fully owns the equipment.Here’s a quick look at the differences between an equipment lease vs. an equipment loan.

Equipment Lease	Equipment Loan
Business pays a monthly flat fee to rent the equipment	Business pays a monthly fee to cover part of the purchase price plus interest
Monthly payment may be lower than a loan payment	Monthly payment may be higher than a loan payment
At end of lease, business must return the equipment (or renew lease or opt to purchase it)	At the end of the loan term, the business has full ownership of the equipment

Recommended: What to Know About Heavy Equipment Financing

4 Ways of Financing Business Equipment Purchases

If you’re thinking about financing your equipment purchase, you have a few different options to consider.

1. Small Business Loan

With a traditional term business loan, you borrow a lump sum and repay it (plus interest) in monthly installments over the term of the loan. You can use the funds from the loan for virtually any business expense, including purchasing equipment. Terms loans are available from banks, credit unions, and online lenders.When applying for a small business loan, you will likely need to present information about your business, financial statements for you and your business (such as profit and loss statements, tax returns, and bank account statements), and also explain how you plan to use the loan.

2. Equipment Loan

Business equipment loans are specifically for equipment purchases. You can get an equipment loan from a traditional bank, an online lender, or an equipment financing and leasing company.In some cases, you must make a down payment of 5% to 20% of the purchase price. The lender then covers the rest of the cost of the equipment. Each month, you pay the lender a portion of the purchase price (plus interest) until you’ve paid for the item in full. Because equipment loans are secured with the equipment you are purchasing (which lowers risk for the lender), approval and funding take place relatively quickly. Even startups are often able to qualify for equipment loans. There are also ways to get equipment financing with poor credit, such as offering additional collateral or increasing your down payment.

3. Business Credit Cards

Another equipment financing option is to use a small business credit card. This may be especially appealing if you are able to get a card with a 0% introductory annual percentage rate (APR). These offers often last as long as 12 to 18 months. If you can pay off the equipment in that time, you’ll get interest-free financing. If you need more time, however, you may get hit with high interest costs. Business cards also tend to have lower credit limits than other types of equipment financing options.

4. Small Business Grants

Grants for small businesses provide free money for startups and existing businesses and, in some cases, may be used for purchasing business equipment. Grants can come from federal, state, and local governments; nonprofit and community organizations; and for-profit companies. Many are designed to help business owners who have historically had trouble getting financing from banks and investors, such as women, military veterans, and members of minority groups.

The Takeaway

It can be wise to make lease vs. buy equipment decisions on a case-by-case basis. Leasing can be a good option for business owners who have limited capital or who need equipment that must be upgraded every few years, while purchasing equipment can be a better option for established businesses or for equipment that has a long usable life.If you decide purchasing equipment makes more sense for your business but want to preserve capital, you may want to explore different financing options. With Lantern by SoFi, you can compare rates from multiple small business lenders with just one application.

Frequently Asked Questions

Is leasing or buying heavy equipment better?

For tax purposes, is it better to lease or buy business equipment?

How is purchasing different from leasing equipment?

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

Photo credit: iStock/junce

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About the Author

Lauren Ward

Lauren Ward is a personal finance expert with nearly a decade of experience writing online content. Her work has appeared on websites such as MSN, Time, and Bankrate. Lauren writes on a variety of personal finance topics for SoFi, including credit and banking.

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