An equipment loan is obtained with the express purpose of purchasing equipment for your business and outright owning the equipment at the end of the term. The equipment being financed secures the loan. So, if you can no longer afford your loan repayment, the equipment will be collected as collateral if you have not arranged for its sale. Alternatively, an equipment lease is a tool used to finance the asset for a temporary period of time, at the end of the lease term the asset will be reclaimed by the seller, or purchased by the lessee (you) at its current market value. Payments during the lease term are generally lower than a comparative equipment loan which makes leases attractive. This is a useful option for business owners who need an expensive piece of equipment for the long term, but can’t afford to purchase it outright from the start.

Leases are the more likely of the two finance options to cover additional soft costs of obtaining new equipment, such as shipping, installation and training.

There are several reasons why leasing rather than buying equipment may be a more attractive option for your company. The main one is that there is no large down payment or high interest rates to consider, often making leasing the more affordable option. With a lease, the lessor is technically still the owner of the equipment and you’re paying them a fee to borrow it.

There are two major types of leases: finance and operating. A finance lease functions as a sort of loan alternative, and it is used when you want to own the equipment in the long term. A common example of this is the “rent to own” model. An operating lease is more like a rental agreement, and in most cases, you will return the equipment to the lessor once the lease is up.

There are many situations where an equipment lease is a better option than an equipment loan for your business. Some examples of when you may prefer a lease include:

• You don’t have the funds for a large lump sum down payment or deposit available.
• You want to test out an expensive piece of equipment before committing to the cost of a long-term investment.
• You are looking for an option where your monthly payments cover the cost of regular maintenance throughout the term of your lease.
• The equipment in question needs to be upgraded regularly for your business to stay current and keep up with current standards in your industry.
• The equipment depreciates quickly and or doesn't have a long term functional life.

Working out both the monthly and the long-term costs of an equipment lease will vary depending on the type of lease you’re considering, the interest rate, the lessor charges and the length of the lease. This handy calculator will help give you a rough estimate of the costs related to $1 buy out lease option, which is a very common choice when considering an equipment lease.

Applying and qualifying for an equipment lease is usually a very quick process. It is a good idea to make sure you have the financial data of your company and its principals available up front, as this can cause the most delay with the application process. Once you’ve submitted your equipment lease application, the lessor will usually notify you of the result of your application in as little as 1 hours to 48 hours.

An equipment loan is when a third party provides you with the funds needed to purchase business-related equipment. As with equipment leasing, this can be any tangible asset that isn’t property. You then repay the value of the loan over a predetermined period as well as interest on the principal sum. The faster you pay off the loan, the less your overall interest will be.

A lender may place a lien on the financed equipment as collateral against your debt. They may also require a personal guarantee. Depending on the value of the loan, they may impose a lien against other assets as well. Another important thing to note is that an equipment loan does not always cover the soft costs related to purchasing new equipment, such as shipping and installation. It also usually requires a deposit up front, or a percentage of the total sum as a one-off down payment.

There are several situations where you may decide that an equipment loan is a better option than an equipment lease for your business. Some examples of when you may prefer a loan include:

• You or your business are able to qualify for favorable terms (interest rates / APR).
• You have the working capital and cash flow available to make the necessary down payment for a loan.
• You want to build business credit and improve your business's credit score so you can qualify for bigger loans with better terms in the future.
• It can be the more affordable option in the long run, despite the steep initial cost.
• You have the expertise or necessary means to maintain the equipment on your own, and you don’t need the additional cost of a maintenance plan.
• The piece of equipment has a long life and won’t need to be replaced on a regular basis.

The rates and terms of an equipment loan will vary depending on current market conditions and your qualifications. This calculator can help you work out what your monthly costs may be so you can accurately judge the maximum value and loan term that your business can afford. Remember that not all loans have a fixed interest rate, and other factors such as your credit score or operating history can affect the final monthly payment.

$1 Buyout Lease

A $1 Buyout Lease, also called a capital lease, is similar to purchasing equipment with a loan. With this type of lease, there is a higher monthly payment compared with an FMV lease, but at the end of the lease term, the lessee  purchases the equipment for $1. Since it is very similar to taking out a loan on a piece of equipment, this type of lease is often used when a business plans to keep the equipment for a long period of time, or when equipment obsolescence isn’t a concern.

• $1 Buyout Leases are often used for equipment that retains its value over time, such as construction equipment, automotive repair, material handling, tooling, cleaning equipment and pressure washers.
• $1 Buyout Leases have a set lease term
• Fixed monthly payments
• Equipment ownership is often transferred to the lessee, and the equipment appears on the balance sheet as company assets.
• For tax purposes, there are benefits to leasing the equipment with a $1 Buyout, rather than purchasing it. Prakash explains how this works: “If you lease a $10,000 pizza oven on a $1 buyout basis, the oven will appear as an asset on your business’ balance sheet, and the lease will appear as a corresponding liability. For tax purposes, using Section 179, it is possible to deduct the entire $10,000 as a business expense in the first year of purchase.”
• At the end of the lease term, the lessee purchases the equipment for $1.

Try the Lendzero $1 Buyout Calculator here

Fair Market Value Lease

A Fair Market Value lease, also known as an operating lease, is probably what comes to mind when you hear the term “lease.” Commonly utilized when someone leases a car, an FMV lease allows the lessee to use the equipment for a pre-arranged time period for a fixed monthly payment. At the end of the lease term, the lessee has the option to purchase the equipment at its then-determined Fair Market Value, return the equipment, or upgrade to new equipment.

• FMVs are often the most affordable leases.
• FMV leases are commonly used to acquire IT equipment, including computers and tablets, servers, software, security systems, GPS, or other technology-based equipment.
• FMV leases are often used when the company does not want to retain the equipment at the end of the lease term.
• FMV leases help manage the cost of continuous upgrades, and can prevent the inefficiencies and maintenance issues related to aging and outdated technology equipment.
• FMV lease terms usually range from 12 to 60 months.
• FMV leases feature a fixed monthly payment.
• Since the lessee does not own the equipment it does not appear on the company’s balance sheet, allowing the lessee to deduct the monthly lease payments as an operating expense.
• Priyanka Prakash, managing editor of FitSmallBusiness.com, explains: “An FMV lease (called a “true lease” by the IRS) doesn’t offer the benefits or responsibilities of ownership to the small business. You are not considered the owner of the equipment, and the equipment doesn’t show up as a business asset on your balance sheet. Since you’re not the owner, you cannot deduct the entire purchase price of the equipment on your federal tax return. You can only deduct the monthly lease payments as a business expense.”
• To qualify for an FMV lease, the applicant must have a good credit score.

Equipment Finance Agreement (EFA)

An EFA, or equipment finance agreement, is a type of business loan where the customer takes ownership of the equipment upfront, and then pays the lender monthly, annually or under a schedule agreed on by both parties. It’s similar to financing a car.

EFAs, are extremely popular with small business owners. According to the Equipment Financing and Leasing Association, 79% of companies in the United States use some form of financing when acquiring equipment. Some of the reasons that business owners love equipment financing include:

• Preserves cash flow: Paying for costly equipment up-front can lead to cash flow constraints. Financing can free up your business’ financial reserves and give you flexibility.
• Sound investment: Equipment financing lets you make a practical, reliable long-term investment in the health of your business.
• Helps keep equipment up to date: It’s easy to put off equipment purchases and upgrades when you have to pay for them up-front. But once you get behind, it’s easy to stay behind, and older and outdated equipment carries a higher risk of breaking down or failing. Financing lets you keep your equipment updated so your business can run smoothly.
• 100 percent financing: In many cases, businesses can get complete financing for the equipment they need with no down payment. Your financing partner may also be able to roll some of the related costs for the equipment, like shipping, installation, and training, into your EFA.
• Speed, flexibility, and convenience: If you work with an independent financing partner, they should be able to tailor the terms of your EFA to your business’ unique needs and get you the financing quickly — often in a matter of days. At Team Financial Group, we are frequently able to provide same-day financing for customers.
• Tax advantages: An EFA enables your business to receive Section 179 benefits and claim bonus depreciation in the same year you acquire the equipment.

Qualifying for equipment financing can be tricky when your business is still relatively new. Many will advise against making this type of financial commitment before you’re sure your business is going to be a success — but sometimes that expensive piece of equipment is necessary for daily operations or long-term success. In this case, it is best to search for a provider that caters to start-ups. These would be institutions with a low annual revenue requirement and a short operational business period requirement.

Different lessors and lenders will have different requirements for qualifying for an equipment loan or lease. An important factor for equipment financing is your personal and business credit score. If you’re not sure what your current credit score is, finding this information online is usually very easy.

The higher your credit score is, the more likely your application is to be approved, and the easier it will be to qualify for and request more favorable finance terms. Many equipment loan providers will require a detailed business plan to help establish how viable your future growth is. How many years you’ve been in business and your profit and loss statements (sometimes for multiple years) are also important.

Other financials, including your balance sheet or cash flow statement, may be required. And, as many financiers are interested in your and your principal members' personal finances, those documents may also be necessary.

Deciding whether a loan or a lease is the best choice to get the equipment for your business can be tricky. However, here are some questions you can ask to help you pick the best option for your particular situation.

• Can you afford the 20% upfront deposit or down payment that most equipment loans require? If not, there are very few equipment loan options available and a lease will probably be best.
• Based on your current income and expenses, how much can you afford to pay every month? This will help you narrow down which provider is the better option for your needs.
• How long do you need this equipment for, and when will it wear out or become obsolete? If you only need this piece of equipment for a short period or it will need to be upgraded/replaced in a relatively short period, then an equipment lease is usually the better option.
• Is the focus of your business on growth or profitability right now? If it’s growth, you want to retain capital, so leasing is probably best. If it’s profitability, owning equipment can help lower overall business costs.

With Lendzero, applying for an equipment lease or loan is easy. 

Step 1: Click on the Get Approved button above and answer a few basic questions about your business, project or need. We will inform you about your best options and how many exist (this will set your expectations). 

Step 2: After this is complete, you will be asked to create a username and password to begin your electronic loan application. This process normally takes about 6 – 7 minutes (if you have all your documents easily accessible and ready). 

To complete the application process, here is what you will need to have handy:

• Business TAX ID (federal tax id number, aka EIN/FEIN)
• Estimated business revenue and average bank balances
• Social security number for all signers
• Last 3 months of business bank statements (download the PDF statements from your business bank account)

Step 3: Once the application process is complete, we will send you the completed loan application for you to review and sign. Once you have signed for your application, the process is complete. You have officially applied and started your journey to receiving pre-negotiated equipment leasing or equipment financing offers. Your Lendzero funding specialist will reach out to you to guide you through the remaining steps of the process, and provide the necessary guidance and support needed with the goal of successfully obtaining the proper funding.