Equipment leasing and equipment loans are both useful ways for a company to obtain the equipment it needs. However, as this article shows, there are some key differences between the two setups.
Equipment Leasing Basics
Equipment leasing functions in the following manner: A lender (the lessor) rents a piece of equipment out to the company in need of the equipment (the lessee). The lessor owns the equipment for the duration of the lease. At the end of the lease, depending on the lease’s terms, there may be an option for the lessee to purchase the equipment, give it back, or renew the lease to continue the use of the equipment.
Beyond that, there are two overarching types of equipment leases, which are described here by the Corporate Finance Institute. A capital lease typically leads to the lessee buying the equipment at the end of the lease, often for an extremely low price. Operating leases function more like a straight-up rental.
Equipment Loan Basics
Equipment loans are a bit different from equipment leases. From the outset, they are designed to allow the borrower to purchase the equipment. The lender puts up the money to purchase the equipment. The borrower may need to contribute a down payment as well. Then, the borrower makes monthly payments to repay the purchase amount (plus interest) over time. Once it is repaid, the borrower owns the equipment outright.
Choosing Between the Methods
Equipment loans and equipment leasing each offer advantages. The best choice for obtaining a given piece of equipment will depend on the company’s circumstances. Companies that do not wish to pay for long-term maintenance and plan to frequently upgrade the equipment will likely be better served by equipment leasing. By contrast, equipment loans are ideal if the company wants to purchase equipment that projects to be in service well past the end of the loan’s repayment period.
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