Equipment financing or equipment leasing: What should a small business owner do?

Equipment financing and equipment leasing are two options businesses consider when acquiring new equipment, but they have different implications and benefits.

1. Equipment Financing:

• Ownership: You own the equipment once the loan is paid off.
• Capital Expenditure: It’s considered a capital expenditure, which means you can depreciate the asset over its useful life.
• Upfront Cost: Generally requires a down payment.
• Credit Impact: It can help build your business credit score if payments are made on time.
• Tax Benefits: You might be able to deduct loan interest and depreciation on your taxes.
• Long-Term Cost: Often more expensive in the short term but can be cost-effective in the long run if you intend to use the equipment for a long time.

2. Equipment Leasing:

• No Ownership: You don’t own the equipment; you pay to use it for a specific period.
• Operational Expense: It’s considered an operational expense, and lease payments can often be deducted as a business expense.
• Lower Upfront Cost: Usually requires less upfront cost compared to buying.
• Flexibility: Easier to upgrade to new equipment at the end of the lease term.
• Maintenance: Some leases include maintenance, reducing additional costs.
• Higher Long-Term Cost: Can be more expensive over the long term, especially if you lease multiple pieces of equipment over time.

Choosing Between the Two:

• Duration of Need: If you need the equipment for a long time and it’s unlikely to become obsolete, financing might be better. Leasing is ideal for equipment that quickly becomes outdated.
• Financial Health: If you have enough capital for a down payment and can handle loan payments, financing could be a good choice. Leasing might be better if you have limited cash flow.
• Tax Considerations: Consult with a financial advisor to understand which option offers better tax advantages for your specific situation.

In summary, the choice between financing and leasing depends on your business’s financial situation, how long you need the equipment, and your plans for future upgrades or expansions.