Equipment financing and leasing, explained

Almost every piece of iron in an industrial business is financed. The two basic routes are an equipment loan, where you own the machine and the lender holds a lien on it, and a lease, where the lender owns it and you pay for its use with a decision at the end. The right choice depends on how long you will keep the equipment, how you want it to sit on your books, and what the tax treatment does for you in a given year.

Loans

Fixed payments over a term shorter than the machine’s useful life, a lien on the equipment, and usually a personal guarantee from the owner. At the end you own it outright. Lenders look at time in business, credit, the equipment’s resale value, and whether it is essential to the work you already have.

Leases

Fair market value lease. Lower payments, and at the end you return the equipment, renew, or buy it at its market value. Suits equipment you replace often.
Dollar buyout lease. Payments that amount to a purchase, with a nominal buyout at the end. It is a loan in a lease’s clothing, often chosen for how it is treated on the books.
Rental. Not financing at all: paying by the day or month for equipment you do not intend to own. The rental company’s business, and often the right answer for a short job.

What to read before signing

The rate expressed as an annual percentage, not as a payment. Any residual or end-of-term obligations. Early payoff terms. Cross-collateral and cross-default clauses that tie one machine’s loan to everything else you own. And the personal guarantee, which is nearly always there.