Two shops buy the same $80,000 machine. One finances it and owns it outright in five years; the other signs a lease with a payment that's $250 lower per month — and ends up paying more over the equipment's life. Neither choice is automatically right: the lease vs. finance decision comes down to how long you'll use the asset, how fast it becomes obsolete, and how the tax treatment shakes out. This guide gives you the actual math and a decision checklist by equipment type.
The three structures, in plain English
Most equipment deals fall into one of three buckets, and the labels matter less than the mechanics:
Equipment financing (loan). You borrow to buy, the lender takes a security interest in the equipment (usually via a UCC-1 filing), and you own it from day one. Terms typically run 2–7 years, sized to the asset's useful life. When the loan's paid, you have a free-and-clear asset with resale value. Learn how underwriting works in our equipment financing overview.
$1 buyout lease (capital lease). Structurally a lease, economically a purchase. You make payments for the term, then buy the equipment for one dollar. Because ownership is essentially guaranteed, the IRS generally treats it like a purchase — meaning you can typically depreciate the asset and claim Section 179. Total cost is usually close to a loan; some businesses choose it because approval paperwork can be lighter.
Fair market value (FMV) lease (operating lease). You're renting. Payments are lower because the lessor keeps the residual value — at the end of the term you return the equipment, renew, or buy it at its then-current fair market value. You never build equity unless you exercise the buyout.
The math: same machine, three ways
Here's an illustrative comparison on an $80,000 machine over 60 months. Rates vary widely by credit profile and asset — these are round numbers to show the structure, not quotes.
| Equipment loan | $1 buyout lease | FMV lease | |
|---|---|---|---|
| Monthly payment (approx.) | $1,610 | $1,620 | $1,380 |
| Total payments (60 mo.) | $96,600 | $97,200 | $82,800 |
| End-of-term cost | $0 | $1 | Return, renew, or buy at FMV (say $16,000) |
| You own it after? | Yes | Yes | Only if you pay the residual |
| Total cost if you keep it | ~$96,600 | ~$97,200 | ~$98,800 |
| Total cost if you return it after 5 years | $96,600 minus resale value | $97,200 minus resale value | $82,800 |
Two takeaways. First, if you keep the equipment, ownership wins — with a loan or $1 buyout you also walk away holding an asset worth something (maybe $15,000–$25,000 on this machine), which drops your true net cost well below the FMV path. Second, if you'd return it anyway, the FMV lease is cheaper and simpler: you paid less, and you never had to deal with reselling used equipment.
The honest way to compare any two offers is Total Cost of Capital over your realistic holding period: every payment, every fee, the residual or buyout, minus expected resale value if you own it.
▦Estimate your equipment financing paymentsRun the numbers in the equipment financing estimator →▸Tax treatment: Section 179, bonus depreciation, and lease deductions
This is where the decision often tilts, so involve your CPA — but here's the framework.
When you own (loan or $1 buyout lease): the equipment goes on your books and you deduct it through depreciation. Section 179 lets many businesses expense the full purchase price of qualifying equipment in the year it's placed in service, up to an annual limit (over $1 million in recent years, with a phase-out for very large purchases). Bonus depreciation can cover amounts beyond that. For a profitable business, deducting $80,000 in year one instead of spreading it over five years can be worth tens of thousands in deferred taxes. You also deduct the interest portion of loan payments.
When you truly lease (FMV/operating lease): you generally can't depreciate an asset you don't own. Instead, the full lease payment is typically deductible as an ordinary operating expense. That's simpler and spreads the deduction evenly — which can actually be preferable if your business isn't consistently profitable enough to use a big year-one deduction.
Obsolescence: the real argument for leasing
Depreciation on paper is one thing; equipment that's genuinely useless in four years is another. The lease-vs-finance answer changes dramatically by asset class:
| Equipment type | Typical useful life | Better fit |
|---|---|---|
| IT hardware, servers, POS systems | 3–5 years | FMV lease — refresh cycle beats ownership |
| Medical/dental imaging tech | 5–7 years, fast tech turnover | Often FMV lease; finance workhorse chairs/tables |
| Trucks, trailers, yellow iron | 10–20 years | Finance — long life, strong resale market |
| Restaurant kitchen equipment | 7–15 years | Finance or $1 buyout |
| Manufacturing/CNC machinery | 10–25 years | Finance — these hold value for decades |
| Fitness equipment | 5–8 years, member expectations matter | Mixed — lease cardio tech, finance strength equipment |
The rule of thumb: finance assets that outlive the term; lease assets the term outlives. A dump truck with a 15-year life financed over 5 years gives you a decade of payment-free use. A server rack financed over 5 years leaves you owning hardware nobody wants in year four.
Industry context helps too — see our guides on trucking and fleet financing and medical and dental practice financing for asset-specific norms.
Cash flow, collateral, and balance-sheet considerations
Down payment. Equipment loans often require 0–20% down; strong profiles frequently get 100% financing including soft costs (delivery, installation, training). Leases commonly require just the first and last payment upfront. If preserving cash is the constraint, compare actual cash-at-signing, not just structure.
Collateral scope. Equipment deals are typically secured only by the equipment itself — a targeted UCC filing rather than a blanket lien across your business. That keeps other assets free for a business line of credit or future borrowing. Read more on how liens work in our guide to collateral for business loans.
Maintenance and usage terms. FMV leases usually include return conditions — usage limits, wear standards, sometimes required maintenance plans. Exceeding them means end-of-term charges. Owned equipment has no such strings, but repairs are entirely yours.
Accounting. Under current lease accounting standards, most multi-year leases land on the balance sheet anyway, so the old "off-balance-sheet" argument for leasing has largely disappeared for businesses with reviewed or audited financials.
Decision checklist: lease or finance?
Run through these five questions:
- Will you use it longer than the term? Yes → finance or $1 buyout. No → FMV lease.
- Does it hold resale value? Trucks, machinery, and construction equipment do → own them. Tech doesn't → lease it.
- Can you use a big year-one deduction? Profitable business with tax exposure → ownership plus Section 179 is compelling. Thin or no profit → the lease's steady expense deduction may fit better.
- Is cash at signing the binding constraint? Compare true upfront costs on real quotes — leases often win here, but 100% financing exists for strong files.
- Do you want the upgrade path? If staying current is a competitive requirement (patient-facing tech, member-facing gym equipment), an FMV lease builds the refresh into the payment.
If three or more answers point the same direction, you have your structure. If it's genuinely split, price both and compare total cost over your expected holding period.
Get lease and loan quotes competing on the same deal
The biggest pricing mistake businesses make is getting one quote — usually from the equipment dealer's captive financing desk — and signing it. Dealer financing is convenient, but it's one offer, and the structure that's easiest for the dealer isn't necessarily cheapest for you.
EQ Funding is a financing marketplace: one application reaches a network of lenders across the US and Canada that compete to fund your equipment purchase, so you can compare loan and lease-style structures side by side on rate, term, down payment, and end-of-term terms. EQ isn't a lender — the lenders in the network make the offers and decisions — but competition is how you find out what your deal is actually worth.