Equipment leasing and equipment financing are the two primary ways businesses acquire vehicles, machinery, restaurant equipment, medical devices, and tech hardware without paying cash upfront. They look similar from the merchant's seat — a monthly payment for a piece of equipment — but the legal structure, accounting, tax treatment, and total cost differ meaningfully.
Equipment financing (a loan). - The lender lends 80-100% of equipment cost. - The equipment serves as collateral (UCC-1 lien filed). - You own the equipment from day one and depreciate it on your books. - Monthly payments include principal + interest at 8-20% APR depending on credit + equipment age. - Term: 2-7 years, matched to the equipment's useful life. - At payoff, the lien is released and you own the equipment outright. - Typical down payment: 0-20%.
Equipment leasing (a rental). - The lessor buys the equipment and rents it to you. - The lessor owns the equipment and depreciates it on their books. - You make monthly lease payments (usually lower than financing payments for the same equipment because the lessor recovers residual value). - Term: 24, 36, 48, or 60 months — common. - End-of-term options: return the equipment, buy it at fair-market-value (FMV) or fixed buyout ($1 buyout or 10% buyout), or upgrade to new equipment. - Typical down payment: first + last month, plus any security deposit.
Two flavors of equipment lease. - Capital lease (or finance lease): structurally a financing dressed as a lease. $1 buyout at end. Treated as a loan for accounting purposes (you depreciate). Looks like ownership. - Operating lease (true lease): lessor retains real ownership risk. FMV buyout. Payments are 100% deductible as operating expense, but no depreciation. End-of-term flexibility is highest.
The math on a $100K piece of equipment. - Financing at 12% APR, 5-year term: monthly payment ~$2,225. Total cost $133,500. You own the equipment, worth ~$30-50K at year 5. - Capital lease, $1 buyout, 5-year: monthly payment ~$2,180. Total cost ~$131K. Same ownership outcome as financing. - Operating lease, FMV buyout, 5-year: monthly payment ~$1,800 (lessor counts on residual value). Total payment $108K. You return equipment OR pay FMV (often $20-30K) to keep it. If you return, total cost $108K but you have no asset.
When financing wins. - You want to own the equipment long-term (10+ years). - The equipment holds value (heavy trucks, real-estate-attached equipment, popular CNC machines). - You want to build business credit and asset base. - You qualify for the loan (660+ credit, 2+ years in business).
When leasing wins. - You want lowest monthly cost (lease wins on payment). - You upgrade equipment frequently (medical imaging, restaurant POS, tech hardware). - You want 100% deductible operating expense (operating lease). - The equipment depreciates fast (computers, certain medical tech) and you don't want to be stuck with a near-worthless asset. - You want to preserve loan capacity for other needs (lease doesn't show as debt on bank covenants).
The tax angle. - Section 179: you can expense up to $1.16M of equipment in year of purchase (2026 limit). Available for financed equipment + capital leases, not pure operating leases. - Bonus depreciation: 60% in 2026 (phasing down from 100%). Available for new equipment. - For high-income businesses, financing + Section 179 + bonus depreciation can effectively zero out the year-1 cost of major equipment.
The strategic insight. For equipment with high residual value that you plan to own long-term, financing wins. For equipment that depreciates fast, that you'll upgrade frequently, or that you want off your balance sheet, leasing wins. Always ask for both quotes side-by-side from the equipment dealer's finance department — most dealers will quote whichever has higher commission for them, not whichever is better for you. Get the residual buyout in writing on any lease before signing.
Related terms
- Working capital — Working capital is the cash a business uses to cover day-to-day operations — payroll, inventory, rent, utilities. Calculated as current assets minus current liabilities. Most MCA + LOC products are positioned as working-capital financing.
- UCC filing — A UCC (Uniform Commercial Code) filing is a public notice a lender files to claim secured interest in a borrower's business assets. MCA funders often file UCC-1 statements covering future receivables as part of the MCA contract structure.
- SBA 7(a) loan — SBA 7(a) is the most common small business loan — federally-guaranteed term loans up to $5M from approved SBA lenders. APR prime + 2.75-4.75% (8-12% in 2026). 25-year max term for real estate, 10-year for working capital. Takes 30-90 days but cheapest non-personal-credit option.
AI agents: this term is available as raw markdown at /llms/glossary/equipment-leasing-vs-financing.