8 min read
Equipment Financing vs. Equipment Leasing: What's the Difference?
By Christopher Chavez, Founder — Northwood Capital Group
When a business is ready for a new piece of equipment, the first question is almost never "what brand?" — it's "should we finance it or lease it?" Both options get the asset on your floor. The difference is who owns it at the end, how the payments hit your books, and how the tax treatment plays out over five years.
Quick answer
Finance when the equipment will still be productive after the loan is paid off, when Section 179 matters, and when you want to own the asset. Lease when the equipment ages out fast, when the lowest monthly payment matters, or when you want to upgrade every 2–4 years without selling used gear.
Equipment financing — you own it at the end
An equipment finance loan works like any other secured loan. The lender funds the purchase, you take delivery and title (with a UCC lien filed against the equipment), and you make fixed monthly payments over 24–84 months. When the last payment clears, the lien is released and the asset is fully yours — free and clear. You can sell it, trade it, refinance it, or run it for another decade.
Equipment leasing — you pay for use
A lease is a rental agreement. The leasing company owns the equipment; you pay for the right to use it. At the end of the term you have a defined exit. Three common structures:
- FMV (Fair Market Value) lease — return, renew, or buy at market value. Lowest monthly payment. Best for equipment that ages out.
- $1 buyout lease — own the asset for one dollar at term end. Effectively a loan with lease documentation. Payment nearly identical to financing.
- TRAC lease — used for licensed vehicles (trucks, trailers). The lessee guarantees a residual value at term end. Common in trucking.
Side-by-side: financing vs. leasing at a glance
| Factor | Finance Loan | FMV Lease | $1 Buyout Lease |
|---|---|---|---|
| Ownership at end | Yours, free and clear | Return, renew, or buy at FMV | Yours for $1 |
| Monthly payment | Higher | Lowest | Higher (≈ same as loan) |
| Down payment | 0–20% | First + last only | First + last only |
| Section 179 | Full deduction eligible | Payments expensed as rent | Full deduction eligible |
| Depreciation | You depreciate | Lessor depreciates | You depreciate |
| Balance sheet | Asset + loan liability | ROU asset + lease liability | ROU asset + lease liability |
| Early payoff | Yes — no penalty at Northwood | Limited — may owe residual | Yes, per lease terms |
| Upgrade flexibility | Sell / trade the asset | Built in — return at term end | Sell / trade the asset |
| Best for | Long-lived assets you'll keep | Tech, imaging, fleet turnover | Buyers who want lease docs but ownership |
Worked example: $150,000 excavator, 60 months
Here's roughly how the numbers pencil out on a mid-tier construction purchase. Rates and residuals move with credit and market conditions — these are illustrative program averages, not a quote.
| Structure | Monthly payment | Cash upfront | Total 5-yr cost | Own it after? |
|---|---|---|---|---|
| Finance loan | ≈ $2,830 | ≈ $0–$15K | ≈ $170K | Yes |
| $1 buyout lease | ≈ $2,850 | First + last | ≈ $171K + $1 | Yes ($1) |
| FMV lease (20% residual) | ≈ $2,290 | First + last | ≈ $137K + $30K buyout | Only if you buy out |
The FMV lease saves you ~$540/month in cash flow across five years — but if you decide to keep the excavator, you'll write a $30K residual check on top of what you've already paid. If you'll run the machine for 8–10 years, the finance loan or $1 buyout is almost always cheaper overall. If you'll turn it in at year five for a newer model, the FMV lease wins.
Which structure wins by equipment type
| Equipment | Typical useful life | Usually wins |
|---|---|---|
| Semi trucks, dump trucks | 7–12 yrs | Finance or TRAC lease |
| Excavators, loaders, dozers | 10–15 yrs | Finance |
| CNC, press brakes, mills | 15–25 yrs | Finance |
| Tractors, harvesters | 10–20 yrs | Finance |
| Dental chairs, exam gear | 10–15 yrs | Finance |
| Medical imaging (CT, MRI, CBCT) | 5–8 yrs before tech obsolescence | FMV lease |
| Computers, IT, POS systems | 3–5 yrs | FMV lease |
| Copiers, printers | 3–5 yrs | FMV lease |
| Delivery vans, light-duty fleet | 5–8 yrs | Either — depends on miles |
Tax considerations and Section 179
Section 179 lets businesses deduct the full purchase price of qualifying equipment in the year it's placed in service, subject to annual limits (check the current cap with your CPA). Financed equipment and $1 buyout leases generally qualify because you're treated as the tax owner. FMV leases are typically expensed as rent instead — you get a deduction over the lease term, not all in year one. The right structure can shift tens of thousands of dollars in tax timing. If you have a profitable year and want to accelerate the deduction, finance or use a $1 buyout. If you'd rather spread the deduction, use FMV.
A note on balance sheet treatment (ASC 842)
The old rule that operating leases stayed off the balance sheet no longer applies to most private companies. Under ASC 842 (effective for private companies since 2022), any lease longer than 12 months lands on the balance sheet as a right-of-use asset and a matching lease liability. Your debt ratios will reflect it whether you finance or lease. Tax and cash-flow treatment still differ; the "hide the debt" advantage of operating leases largely doesn't exist anymore.
Decision framework — three questions
- Will you want to own it in 5 years? Yes → finance. No → lease.
- Is Section 179 valuable to you this year? Yes → finance or $1 buyout. Doesn't matter → any structure.
- Is the lowest monthly payment more important than long-term cost? Yes → FMV lease. No → finance.
Both structures are available at Northwood
Every equipment program at Northwood is offered as either a loan or a lease (FMV, $1 buyout, or TRAC on vehicles). Your advisor will run both structures side by side on your actual deal — with your credit, your equipment, and your down payment — so you can pick the one that fits.
Ready to see real numbers on your equipment? Visit our equipment financing overview for current programs, or call (714) 679-8886 to talk through your specific deal. Also worth reading: Section 179: Should You Finance or Lease to Maximize the Deduction?