Equipment financing and leasing are both valid ways to gain access to the gear your company needs. However, there are some important differences between the two, which can make one or the other better in certain circumstances.

The Lowdown on Leasing

In a broad sense, equipment leasing works somewhat like leasing an apartment or a car: Your business enters an agreement that gives it access to the equipment for a set period of time, in exchange for monthly payments. Per Entrepreneur.com’s primer on the topic, leasing offers several advantages:

Compared to a loan, equipment leasing may offer lower monthly payments.
Leases can conserve capital for other purposes.
Leasing allows you to frequently switch to the latest equipment.

However, equipment leasing isn’t perfect for all situations. For example, if you think the equipment may be needed for a very long period of time, it may make more sense to purchase it through financing. Also keep in mind that while equipment leasing is somewhat flexible, if you choose the wrong lease length, you may encounter problems like paying for the equipment after you’re done using it.

The Lowdown on Financing

An equipment financing agreement typically takes the form of a loan that allows the business to purchase the equipment outright. The lender extends the funds to make that happen, and the borrower repays the funds in monthly installments, which also involve interest payments. There may also be a down payment required. Financing is a path toward long-term ownership of the equipment, which is a big factor that sets it apart from leasing. (Note that some leasing agreements may have a purchase option, though.)

Like leasing, a financing agreement may preserve cash for other purposes, but if the financing agreement involves a large down payment, that may be somewhat negated. In many agreements, the equipment serves as collateral. Generally speaking, financing is a good choice if the equipment will not be outdated by the end of the loan repayment period.

Want to keep learning about financing options for businesses? Check out the latest blog posts from Commercial Capital Finance.