Leasing is another option for businesses that can’t afford or prefer not to purchase necessary equipment outright. Instead of borrowing money to purchase the equipment, with a lease, you’re paying a fee to essentially rent the equipment. At the end of a lease, you will not own the equipment like you will at the end of a loan, though some leasing companies do offer options that allow you to purchase the equipment at a discount when the lease term is up.
A lease does not require a down payment like a loan does. That can be attractive to businesses that prefer to invest their money elsewhere. A lease usually features lower monthly payments than a loan. Unfortunately, it can be more expensive in the long term. This is because you generally don’t come away with anything at the end of the lease. There are some leases that offer the option to buy the equipment at the end for an extreme discount, like for $1 or 10 percent of the fair market value. However, these leases are much more expensive on a monthly basis because lending companies tack on interest to each payment.
Some businesses prefer to lease equipment because the terms are more flexible than a loan. It can also be a smart choice when the equipment is not long-lasting and will need to be replaced within a couple of years. Examples include a software platform or medical device.
Lease payments are tax deductible for a business unless the lease you choose is designed for your eventual purchase of the equipment.