What is the Difference Between Leasing and Financing?

Estimated read time 3 min read

It’s not uncommon for businesses to lease or finance some of their equipment rather than purchasing it. A construction company, for example, may use one of these purchasing alternatives to secure a bulldozer. With the average cost of a new bulldozer ranging from $75,000 to $150,000, not all construction companies can afford to purchase them outright. Leasing or financing, however, allows businesses to secure otherwise expensive equipment like bulldozers without purchasing it.

What is the Difference Between Leasing and Financing?

Overview of Leasing

Leasing is essentially the same as renting. When you lease a piece of equipment, you pay — usually once a month — to use the equipment from the supplier. The supplier allows your business to use the equipment for the term of the lease, assuming you pay it the bill.

Leasing is an excellent choice for early stage businesses that lack cash flow and credit. Both may be necessary in order to purchase or finance equipment. If a business can afford the monthly lease payments, it shouldn’t have a problem leasing equipment. Most suppliers don’t even require businesses to use collateral when leasing equipment.

Overview of Financing

Financing is a second alternative to purchasing equipment outright. Like leasing, you’ll typically have to make many small monthly payments to use the equipment.

The difference is that financing involves taking on debt that, as you make payments on, will allow you to own the equipment. Leased equipment can also be viewed as a liability. This is because you never own any equipment that you lease.

Financing is offered through private funding sources, financial institutions, and some equipment suppliers. Financial institutions offer it in the form of a loan. These loans can either be secured or unsecured, the former of which required collateral. And like other traditional loans, the borrower (the business) takes on debt.

Once the business has paid off the loan, however, it will own the financed equipment. Equipment financing loans are designed specifically for purchasing equipment.

As a business owner, you might be wondering if you should lease or finance your equipment. If purchasing isn’t a financially feasible option, either of these solutions can help you secure the necessary equipment to perform your business’s operations. You’ll be able to make many smaller payments rather than a single big payment to secure the equipment. Furthermore, both leasing and financing offers tax incentives for businesses as well.

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