Equipment Loan Rates Today vs. Leasing Costs: Which Is Cheaper for Your Business?

Many businesses start as an idea. But equipment is often what can help you execute that idea, depending on the industry. Whether you're in hospitality, construction, or medicine, having the right equipment is non-negotiable. The issue is that the purchase price of just one item can be thousands of dollars. To help you make costs more manageable, you might look into an equipment loan or lease. But which one is cheaper for your business? In this piece, we cover equipment loan rates today vs. leasing costs, pros and cons, and how to decide which option is the best fit.

What is Equipment Financing?

Equipment financing helps small business owners acquire new or used equipment through a loan. If you want to own the equipment outright, an equipment loan provides capital. In exchange for monthly payments, you get ownership.

If you want more flexibility and not commit to ownership, an equipment lease may be more advantageous. In exchange for monthly payments, you get access to the equipment.

Equipment loans help borrowers purchase equipment and typically pay the vendor directly. As a borrower, you get the equipment and repay the funds based on the loan term. Once the loan is completely paid off, you have full ownership of the equipment.

Equipment leases provide more flexibility and can be structured differently. Depending on the type of lease, you may have the option to return the equipment, upgrade it, or purchase it at the end of the lease. An equipment lease can act more like a rental agreement and doesn't help you build equity like an equipment loan and may not lead to ownership.

Overview of Equipment Loan Rates Today

Equipment loan rates today can vary widely depending on the lender, your credit score, and the loan amount.

For example, some credit unions and community banks advertise single-digit APRs for qualified borrowers. Other lenders note that equipment loan APRs range can vary.

Many factors impact equipment loan rates today and what you might qualify for as a borrower.

What Factors Impact Equipment Loan Rates Today?

Given that equipment loan rates today can vary significantly, it's important to know what factors impact them. Here's a quick overview.

Credit Score

When you look at what equipment loan rates today you might qualify for, your credit score is a major factor. Those three digits show lenders your past behavior as a borrower and how likely you are to repay the loan. Higher credit scores can help you qualify for competitive rates.

It's a good idea to check your personal credit score and business credit score before applying for equipment financing. To improve your score, make your monthly payments on time while keeping your credit utilization low.

Time in Business

If you're a veteran business owner, you may qualify for better equipment loan rates today than a newcomer. A proven track record and a long time in business can be less risky for lenders. Typically, lenders have minimum time in business requirements.

Annual Revenue

Another metric that lenders look at is your annual revenue. When determining the equipment loan rates today that you qualify for, lenders want to know you have the cash flow and revenue to repay what you borrow.

Type and Age of Equipment

If you purchase new equipment, you may qualify for lower equipment loan rates today than if you purchase used equipment. New equipment has a longer shelf life and higher resale value. So, if the lender must repossess your equipment due to non-repayment, they can recoup more of their investment.

On the other hand, highly specialized equipment may be riskier for lenders. It can be more challenging to sell if it gets repossessed, which can lead to higher interest rates.

Loan Amount

Your loan amount is another factor that can impact equipment loan rates. Higher loan amounts tend to carry more risk, which could translate to higher equipment loan rates today. However, if you have a strong credit profile, you may still qualify for competitive rates, despite a high loan amount.

Term Length

Your term length refers to the span of time you have to repay the loan. In general, a shorter repayment term can lead to more favorable equipment loan rates today. Longer repayment terms also carry more risk, which could lead to higher interest rates. A longer repayment term provides borrowers with more manageable monthly payments but also increases the total cost of borrowing.

Down Payment

Some lenders provide 100% equipment financing. So, instead of putting down a 10% to 20% down payment, you may be able to qualify for the loan without an initial investment upfront. While the equipment is a form of collateral and reduces the lender's risk, providing a down payment could reduce the risk even further and lead to better equipment loan rates today.

Lender

The good news is that you can get equipment financing from banks, credit unions, online lenders, and directly through equipment vendors. That said, each type of lender has different underwriting criteria. So, the equipment loan rates today offered by each lender can vary widely.

How Equipment Leasing Works and Typical Costs

An equipment lease is an alternative way to access the equipment you need without paying the upfront cost. Instead of getting a loan to own the equipment, you can pay to use it for the duration of your lease term.

Leasing equipment is an attractive choice for business owners who don't want to commit to ownership or want to upgrade items on a regular basis. Generally, there are two types of equipment leases.

1. Capital lease:

Sometimes called a finance lease, this arrangement is more of a rent-to-own agreement and is treated more like a loan for accounting purposes. The equipment counts as an asset on the balance sheet, and business owners may be able to claim depreciation. At the end of the lease, you may own the equipment or have the option of a nominal buyout.

2. Operating lease:

This type of lease is more like a straight rental agreement where you pay for access. Your monthly lease payments may be tax-deductible because they're considered business operating expenses. You may have the option to return the equipment, upgrade and get new equipment, or pay the fair market value at the end of your lease.

Equipment Loan vs. Equipment Lease

If you need to finance equipment, getting a loan or a lease can be a good option. But you want to know which option is cheaper for your business. Not only that, but you also want to understand which option is ideal for your needs. So, you want to start by comparing equipment loan rates today versus leasing costs and reviewing the pros and cons of each option. However, these may not always be true for each agreement, and the terms can vary.

Equipment Loan Pros:

• Full ownership
• May be more affordable in the long-term
• Fewer restrictions

Equipment Loan Cons:

• May require a down payment
• Could have higher monthly payments
• Risk of equipment obsolescence

Equipment Lease Pros:

• Lower monthly payments
• More flexibility to upgrade or return equipment
• May not have a down payment

Equipment Lease Cons:

• Might have equipment use restrictions
• Early termination fees
• No ownership or equity

If the equipment will be used for many years to come and plays a pivotal role in your business, an equipment loan may be a better fit. Equipment loans help you buy the equipment, without paying for it upfront. Instead, the cost is broken down into monthly payments that are often easier on your cash flow.

Which is Cheaper? Here's What to Consider

When comparing equipment loan rates today and leasing costs, you need to look at the total cost of ownership to make a fair comparison. Leasing may look more affordable initially, but it could cost you more in the long run.

It's important to run your numbers as every situation is different, and one option may prove to be cheaper than the other. Even if it's not cheaper, it may be more aligned with your needs.

Here are some things to consider.

• Upfront costs: You may need a 10% to 20% down payment for an equipment loan. On the other hand, an equipment lease may not have an initial cost.

• Monthly payments: Equipment loan payments are typically higher than equipment lease payments. But you're building equity over time and eventually will have full ownership.

• Additional costs: With a loan, you may be on the hook for repairs, depreciation, as well as maintenance. Leases can come with early termination fees and buyout costs.

• Cash flow: Consider how equipment loan payments vs. equipment lease payments will impact your cash flow.

• Upgrade cycle: You may have more flexibility to upgrade equipment with a lease. But if you know your equipment will last in the long term, a loan can be a smart choice. Consider the equipment lifespan, when you might need an upgrade, and the risk of obsolescence.

• Tax considerations: A loan may provide tax benefits for depreciation, while a lease may allow you to deduct your payments.

To help you decide whether an equipment loan or lease is a better option, consider your needs, goals, and cash flow. If you go with an equipment loan, you'll likely have fixed rates. Unlike variable rates, which change, fixed rates stay static.

Additionally, look into the eligibility and credit approval requirements and the loan application process. Remember that funding timelines can vary and may take several business days.

Final Thoughts

Whether you need heavy equipment for construction, restaurant, or medical equipment, a loan or lease can be a valuable tool. These financing solutions allow you to access what you need and spread the costs over time. To help you get a better understanding, you can use a loan calculator to estimate your monthly payments and total costs over the term or lease.