Walking into an industrial equipment dealer your purchase options can seem a bit fuzzy, with terms like “dollar-out” and “early purchase option”, which makes the deal sound a lot like financing. Let’s start simple on terms: ownership. With an equipment lease, the lessee is renting the equipment at a monthly rate for an agreed upon period of time. No equity is acquired by lessee in the transaction, unless a buy option is exercised. With equipment financing, funding is secured to own the equipment, while leveraging said equipment as collateral until the loan is repaid and all contract terms met.
While those are the simplest of definitions, many commercial finance companies offer programs that straddle the two options with attractive lease options with lower risk to the finance company, yet provide an affordable buyout option at or near the end of the lease term for the lessee to take ownership.
There are some end-of-term similarities between the two, the differences between loans and leases are more apparent as we dive into ownership equity and up-front costs. Below we will get into some of the key distinctions of each, along with some indicators on when it’s best to take on a lease vs a loan.
Equipment Leases
Low-to-no down payment. Leases often have lower entrance requirements as far as upfront capital or collateral is concerned, as the acquired equipment is the primary means of collateral. Since lease payments are more likely dependent upon the value and expected depreciation of the equipment and qualification is based on borrower credit, approvals are often a simpler process. While regular maintenance is the responsibility of the lessee, many leases leave the responsibility for equipment repairs on the lessor, or the warranty they’ve procured for the equipment in question.
Equipment Loans
Generally speaking, equipment loans are more dependent on borrower credit than leases, therefore a borrower with higher credit score will have lower payments. And, while there often is a down payment for the loan, ownership equity in the equipment begins on day 1.
What Should I Choose?
While each situation is unique, here are a few simple tips you might find helpful:
- Equipment which has a shorter useful life or will be quickly replaced is better to lease.
- If you have a lower credit score but capital to invest, an equipment loan with a larger down payment and a possible cosigner will make more financial sense, and help build credit.
- When the equipment’s resale value is higher (lower depreciation), a loan may be more cost-effective monthly than a lease, leaving you with an asset at the end of the finance term.
If you would like to speak with an industrial equipment lease and loan expert, contact ENGS Commercial Finance today.