What is the Difference between Equipment Financing and an Equipment Lease?

The primary difference between equipment financing and an equipment lease lies in ownership, structural mechanics, and tax treatment. Equipment financing is a loan secured by the equipment, which results in the borrower owning the asset outright after the final payment is made. In contrast, an equipment lease grants the business usage rights for a fixed term; the lessor retains ownership throughout, and at the end of the term, the business must either return the equipment or exercise a buyout option to acquire it.

Additional distinctions include:

Cost Calculation: Equipment financing typically uses an interest rate (APR) to determine costs, whereas leasing utilizes a lease factor.

Term Comparison: Financing terms generally range from two to seven years, while leases typically last between one and five years.

Accounting Treatment: Financed purchases are often classified as a capital lease, appearing as both an asset and a liability on the balance sheet, whereas operating leases have their own recognition requirements under current standards like ASC 842.

Tax Benefits: Financing may allow for depreciation deductions, including Section 179 and bonus depreciation, as well as interest deductions. With leasing, the lease payments themselves are generally deductible as a business expense.