What’s the difference between a loan, a lease, and an equipment finance agreement?

Although the difference between a loan and a lease is relatively straightforward, equipment finance agreements blur the line between the two. As part of this section, we’ll discuss some of the key differences between loans, leases, and finance agreements.

Furthermore, a lease is classified as either an operating lease or a capital lease. When we say “lease,” we mean an operating lease. Essentially, capital leases (such as $1 buyout leases) and equipment finance agreement are the same thing.

Purchases are funded by Loans

Loans are used to finance equipment purchases, real estate purchases, or receivables and inventory purchases. If you’ve ever had a car loan, an equipment lease is essentially the same, only with a larger loan amount. An equipment loan typically only requires you to borrow a portion of the money you need, and you fill in the rest with your own finances as a down payment. Debt will appear on your balance sheet, and interest and depreciation can be expensed monthly.

Lenders and borrowers sign loan agreements. Generally, a loan contract specifies how much you borrowed and at what interest rate you will repay it. You may be able to determine the details of your loan agreement based on your credit score and other factors. With a traditional loan, the principal and interest vary depending on how quickly you repay the loan and whether you pay before, on, or after the due date. So, your loan payments may fluctuate over time. In order to get an equipment loan, you can work with a financial institution or an independent financing partner like Team Financial Group.

Ownership: Your business owns the equipment purchased with the borrowed money.

Leases are agreements for the use of the equipment.

Operating leases are agreements for renting equipment. If you’ve ever leased a new car, you’ve had an operating lease. Equipment leased under an operating lease is not yours to own. A lease payment is generally fixed, and many financing partners offer 100% financing through an operating lease, so you don’t have to put anything down.

Equipment that quickly becomes obsolete, such as equipment that needs to be upgraded frequently, is a popular option for leasing. Many businesses lease equipment such as:

  • Vehicles for construction
  • Equipment for agriculture
  • Servers, computers, and other technology/networking equipment
  • Solar panels, LED lighting, and other building energy needs
  • Equipment for the office, including copiers, printers, storage cabinets, and telephone systems

The lessor owns the equipment throughout the lease term. After the lease term ends, you typically have the choice of purchasing the equipment at its fair market value (FMV), returning the equipment to the leasing company or the dealership (if you leased through the vendor), or continuing to lease the equipment.

So What are Finance Agreements ($1 Buyout)?

Equipment finance agreements (EFAs) are similar to loans, but they aren’t traditional loans. In a finance agreement, your amortization schedule remains the same regardless of when you pay each month and how much you pay. Equipment finance agreements don’t state interest rates and don’t break down the balance by principal and interest. Finance charges are instead incorporated into the fixed payments you make over the finance agreement’s term.

Basically, a finance agreement is similar to a lease in terms of how it is paid back. Similarly to leasing, 100% financing is available on entire equipment purchases without a down payment. In contrast, with a finance agreement, you own the equipment outright, similar to a loan, and the debt appears on your balance sheet.

Finance agreements combine the ownership aspects of loans with the financing structure of leases. They are a type of financing arrangement. Long-term equipment and assets are often purchased through these agreements.

Ownership: Equipment is owned by the company, and monthly payments are made on the loan.

RELATED ARTICLE: How to Choose the Right Commercial Lender

Loan vs Lease — Which Type of Financing Is Right for My Business?

How do you choose the best commercial financing option for your business? Team Financial Group determines your best financing option based on a variety of factors. These three questions will give you a general idea of what to expect before you apply.

What Type of Equipment Am I Financing?

In the event that you need to upgrade your equipment frequently or if it is likely to become obsolete in a few years, you may want to consider leasing the equipment. Since you don’t own the equipment, leasing allows you to keep track of the costs of continuously updating it. In order to obtain the latest and greatest equipment models, you can enter into a new lease agreement at the end of your lease term.

In contrast, a financing agreement may be more suitable if your business is expanding and needs heavy equipment that will retain residual value. With a fixed term and fixed payment, you will own the equipment right away. As a result, your company can choose how to depreciate the equipment.

Do I Have Any Unique Financial Considerations?

Although your business’s needs and the length of time it plans to use the equipment are essential considerations, sometimes your business has unique requirements that also affect your choice. Businesses in the construction, landscaping, and masonry industries, for example, may experience seasonal changes in cash flow. Our team of experts can work with these seasonal changes and create a payment structure that fits your company’s needs. The seasonal cash flow of an agricultural client may indicate that a lease with flexible payments would be the best choice, as was the case for one of our agricultural clients.

Does the financing need to cover the whole cost of the equipment or only a portion?

Finance agreements for equipment work well when you need to cover 100% of the equipment’s cost with financing. Team Financial can, however, reduce your payments if you have the capital to make a significant down payment on the equipment.

Financing options tailored to your business are available through Team Financial Group.

We offer custom lease and finance agreements to suit your business needs at Team Financial Group. By providing flexible and efficient financing options and personalized service, we’re dedicated to helping our clients succeed.

Are you ready to begin? It’s easy to apply! You can apply by visiting our application page, filling out your contact information, and a commercial finance expert will contact you to help you through the application process.

Please contact us if you have any questions or concerns before starting the application process. Please feel free to contact us by phone at 616-735-2393 or by filling out our convenient online contact form.

Leave a Reply

Your email address will not be published.