When you’re looking to finance equipment for your small business, you’ll likely come across two main types of agreements: lease agreements and equipment financing agreements (EFAs). While both have their benefits, there are some key differences that you should be aware of before signing on the dotted line.
In this blog post, we’ll take a closer look at EFAs and leases, explain the benefits and drawbacks of each, and help you decide which option is right for you.
Equipment Leasing vs. Equipment Financing: Similarities and Differences
Equipment leasing and equipment financing agreements are two terms used to describe a similar method of funding your investment.
An EFA is essentially a loan that you repay over time. You may not borrow the full purchase price of equipment all at once, but, instead, you pay off what you owe in a series of installments. This type of equipment financing is a good option if you want a traditional equipment loan but don’t have any collateral to put up. The relationship is between a lender and a borrower (you).
In equipment leasing agreements, the equipment is purchased by a third-party company that leases the equipment to your business. You then make monthly payments to the equipment financing company to use the equipment. Leasing equipment is advantageous because it allows you the benefit of equipment ownership while eliminating a large initial capital outlay. It is also beneficial for equipment that may not be used as frequently or equipment that is needed for special projects.
Equipment leasing can be expensive if your equipment needs are sporadic because the equipment financing company will need to offset costs over time with stable equipment users. Leasing equipment can also be more complex than equipment financing agreements, as owners may need to file equipment titles with their state every time ownership changes hands.
Equipment Financing Agreement vs. Lease: Ownership and Liability
One of the main differences between an equipment leasing and equipment financing agreement is who actually owns the equipment at the end of the term.
In equipment leasing agreements, the equipment financing company retains ownership of equipment. However, in an equipment financing agreement, you will own your equipment once it is fully paid for.
Leasing equipment can be advantageous if equipment ownership is important to your business, but EFAs are beneficial when liability is more important. Since equipment leasing companies retain ownership, they also accept equipment-related risk. This means that the equipment financing company is liable for repairs and maintenance throughout the financing term.
It may be beneficial to consider equipment leasing if issues can cause serious problems for your business, such as equipment malfunctions that shut down production lines. On the other hand, financing companies will often require equipment owners to take out insurance on equipment, transferring equipment-related risk to equipment owners.
Equipment Financing Agreement vs. Lease: Financial and Tax Implications
Owners need to consider how equipment-related deductions will impact their tax obligations.
Leasing companies may offer equipment owners the opportunity to take equipment-related tax deductions in their lease agreements by filling out a tax election form. This is a form that allows equipment owners to count lease payments as equipment-related financing costs, which are directly deductible.
Meanwhile, equipment financing agreements do not offer equipment owners tax advantages. Instead, they can receive a Section 179 deduction for equipment purchases if the equipment is used more than 50% of the time for business.
Need Expert Help With EFAs and Leasing? Call Charter Capital
Both leasing and equipment financing agreements provide benefits, but it’s important to consider which option will work best for your needs. You can get equipment-related expertise and support from Charter Capital, a leading equipment finance company that has been helping small to medium businesses grow for more than 40 years.
Contact the knowledgeable team at Charter Capital for any questions about equipment leasing and EFAs today.