Equipment lease vs. loan: which is better for a small business in 2026?

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Most of what ranks for this question is written by banks and says some version of “it depends.” It does depend, but on a short list of things you already know: how long you will keep the machine, how fast it goes obsolete, how much cash you want to hold back, and whether you want the tax deduction now or spread out. This guide puts numbers on each of those. Five West writes both structures, so we have no reason to steer you toward one.

What is the difference between an equipment lease and an equipment loan?

With an equipment loan, usually documented as an equipment finance agreement (EFA), you own the equipment from day one, the funder holds a lien on it, and the payments amortize the full price to zero. With an equipment lease, the funder owns the equipment during the term, you pay for the use of it, and a residual value is left at the end. That residual is why a lease payment is lower, and the buyout you choose up front decides how big the residual is.

In practice, small-business equipment paperwork comes in four flavors:

Five West writes all four. Leases run 24 to 60 months; EFAs run 24 to 84 months. Full definitions are in the equipment finance glossary.

One point that trips people up: a $1 buyout lease is not really a lease in any way that matters to your cash flow or your taxes. If someone quotes you a “lease” with a $1 buyout, compare it to an EFA, not to an FMV lease. The real decision is between owning (EFA or $1 buyout) and true leasing (FMV), with the 10% option in between.

Is it better to lease or finance equipment?

Neither is better in the abstract. Each is better for a recognizable situation. The pattern below covers most of the files we see.

Finance it (EFA or $1 buyout) when

• You will run it past the term. Excavators, trailers, presses, lifts, and most metal that lasts ten years or more. Paying rent on something you will own anyway costs more than buying it.
• You want the deduction this year. Section 179 and 100% bonus depreciation belong to the owner. In 2026 that is up to $2,560,000 of qualifying equipment in year one, financed or not.
• You want equity. Owned, paid-down equipment is what you borrow against later in a sale-leaseback, and it counts as an asset on the balance sheet a bonding company reads.
• The equipment holds its value. If the market value at year five is still 40% or 50% of the price, a lease residual is just money you will pay anyway.

Lease it (FMV) when

• The technology turns over. Imaging systems, IT, software-heavy machines, lasers, anything where the smart move in four years is the next generation, not the one you have.
• The payment is the constraint. A lease payment on the same machine runs roughly 10% to 15% lower over 48 months, and leases more often close with little or nothing down.
• You want a clean exit. A contract-driven job, a pilot line, a second location you are testing. Return it at the end and owe nothing further on it.
• You prefer an operating expense. Some owners and their CPAs would rather deduct rent evenly than take depreciation. That is a preference, not a rule, and worth a conversation with your tax advisor.

If you are unsure how long you will keep it, price the FMV lease and the EFA side by side. The gap between the two payments is what you are paying for flexibility, and for most owners it is smaller than they expect.

Lease vs. loan on the same $75,000 machine: payment, total cost, and year-one tax

Here is one $75,000 machine, a compact track loader, a CNC lathe, a dental operatory, the arithmetic is identical, at 9% over 48 months. Nine percent sits at the top of A-credit pricing and the bottom of B-credit on Five West programs (A credit prices at 7% to 9%, B at 9% to 12%, C at 12% to 18% and up). The FMV residual is 20%, which is the assumption our Quote Builder uses at 48 months.

Payments computed at 9.00% over 48 months in arrears on $75,000 with no down payment; residuals of $1, $7,500 (10%), and $15,000 (20%). Illustrative, not an offer. *Year-one deduction assumes the equipment is placed in service in 2026 and the business has the taxable income to use it; confirm with your tax advisor.

Three things stand out:

1. The FMV lease is $260 a month cheaper, and about $2,500 more expensive if you end up buying the machine. That is the whole trade. You are paying roughly $2,500 over four years for the right to hand it back.
2. The 10% option is the worst of both if you always planned to keep it. It costs $1,241 more than the EFA to own, for a payment that is only $130 lower. It earns its place when the lower payment matters during the term and the fixed $7,500 buyout is money you know you will have.
3. The tax timing gap is large. At a 30% combined rate, the owner deducts $75,000 in year one and saves about $22,500 in tax; the FMV lessee deducts $19,267 of rent and saves about $5,780. The lessee keeps deducting rent every year of the term, so the totals converge, but the owner gets the cash first.

Rate moves the payment more than structure does. The same EFA runs $1,813 at 7.5% and $1,975 at 12%; the FMV lease runs $1,544 and $1,730. A one-tier improvement in credit is worth more per month than switching structures, which is why the credit profile deserves attention before the structure does.

What are the tax benefits of leasing equipment vs. buying it?

The tax question comes down to who owns the equipment in the eyes of the IRS, and that is decided by the substance of the agreement, not what the document is called.

If you own it (EFA, $1 buyout, and usually the 10% option)

You depreciate the equipment, and for most small businesses that means expensing it in year one. For 2026, Section 179 allows up to $2,560,000 of qualifying equipment to be deducted in the year it is placed in service, phasing out dollar for dollar above $4,090,000 of purchases and disappearing at $6,650,000. Bonus depreciation is 100% and permanent under the 2025 tax law for property acquired after January 19, 2025, with no dollar cap. New and used equipment both qualify, and financing does not change any of it: a machine bought with 0% down on an EFA is deducted the same as one bought with cash. Our Section 179 calculator runs the estimate; our Section 179 guide covers the rules.

The IRS decides whether a “lease” is really a purchase using an intent test. Per IRS Publication 535, an agreement is generally a conditional sales contract rather than a lease if, among other things, part of each payment builds your equity, you get title after a stated number of payments, or you can buy the property for a nominal price compared with its value at the time. A $1 buyout fails all three, which is why it is treated as a purchase. Payments under a conditional sales contract are not deductible as rent.

If you lease it (FMV)

On a true lease the funder owns the equipment and takes the depreciation. You generally deduct the lease payments as an ordinary business expense as you make them, evenly over the term. On the $75,000 example that is $19,267 in year one and about $77,069 over four years. There is no Section 179 deduction for the lessee, because you do not own anything to depreciate. If you exercise the FMV purchase at the end, the price you pay becomes your basis and you depreciate that.

Which is better depends on your taxable income. A profitable company that can use a $75,000 deduction this year usually prefers ownership. A company with thin income, or one that expects higher tax rates in later years, may prefer spreading the deduction through rent. Section 179 is also limited to taxable business income, which is a reason some newer companies lease. Your tax advisor should make the call; our job is to make sure the structure matches the plan.

What is the 90% rule in leasing?

The “90% rule” is an accounting test, not a tax one. Under the old lease standard (ASC 840, in force until 2019 for public companies and 2022 for private ones), a lease was a capital lease, meaning it went on the balance sheet like a purchase, if any one of four tests was met: ownership transfers at the end, there is a bargain purchase option, the term covers 75% or more of the equipment’s economic life, or the present value of the payments equals 90% or more of the equipment’s fair value. Anything that failed all four was an operating lease and stayed off the balance sheet.

That bright line is why $1 buyout leases were always capitalized and FMV leases usually were not. It matters less than it used to. Under FASB’s current standard, ASC 842, nearly every lease longer than 12 months goes on the lessee’s balance sheet as a right-of-use asset and a lease liability, whether it is a finance lease or an operating lease. The 90% and 75% thresholds survive only as guidance for classifying which kind it is. If you have been told to lease so it “stays off the books,” that advice is out of date for any company that produces GAAP financial statements. For a business that files on a cash basis and never prepares GAAP statements, the accounting label changes nothing about the payment or the tax result.

What are the downsides of equipment leasing?

• It costs more if you keep the equipment. In the example above, buying the machine at the end of an FMV lease costs about $2,500 more than owning it from the start, and a 10% option costs about $1,200 more. Rent is not free.
• The FMV buyout is a negotiation. “Fair market value” is whatever the lessor and you agree it is at month 48. Ask how it is determined before you sign, and get any cap in writing.
• Evergreen clauses. Some leases renew automatically month to month if you miss the return notice window, often 90 to 180 days before the end of the term. Put the date on a calendar the day you sign.
• Early termination is expensive. A lease is a commitment to the full stream of payments. Ending it early usually means paying most of the remaining rent plus the residual.
• You still carry the obligations of ownership. Insurance, maintenance, taxes, and the risk of loss are on you in nearly every commercial equipment lease, even though the title is not.
• No Section 179. The lessee cannot expense equipment it does not own.
• You still sign a personal guarantee. A lease is a credit decision like any other. Owners of 20% or more guarantee it on almost every small-business file.

What are the downsides of an equipment loan?

• A higher payment. Amortizing the full price costs more each month than paying rent against a residual. On the $75,000 example the difference is about $260 a month.
• Money down on some files. New equipment from a dealer commonly finances with 0% to 10% down; used and private-party equipment more often needs 10% to 25%, and startups usually put money down.
• You own the obsolescence. If the technology moves on, the loss in value is yours, not the lessor’s.
• A lien on the equipment until the last payment. It is a specific lien on that asset, not a blanket lien on the business, which is one of the reasons an EFA is usually a better fit than a line of credit for a long-lived asset.
• Prepayment terms vary. Some EFAs let you pay off early at a discount, some charge a fee, and some simply collect the remaining payments. Ask before you sign, especially if a sale or a refinance is likely inside the term.

What credit score and time in business do you need to lease vs. finance equipment?

The same credit box applies to both structures at Five West. The structure changes the payment, not the approval.

General guidelines, not a promise of approval. See the full qualification guidelines.

Where the structure does matter for approval is the equipment itself. A lessor is taking the residual risk on an FMV lease, so FMV terms are easiest to get on equipment with a deep resale market and a predictable value curve: material handling, construction iron, medical and imaging systems, machine tools. Custom or highly specialized equipment with no secondary market tends to be written as an EFA or a $1 buyout, because nobody wants to own the residual.

What happens at the end of an equipment lease?

On a $1 buyout, nothing dramatic: you pay the dollar and the title is yours. On a 10% option, you pay the fixed buyout or, on many contracts, return the equipment instead. On an FMV lease you have three choices, and the choice is the point:

1. Buy it at its fair market value. On equipment that holds value this is often close to the residual the lessor assumed; on equipment that has fallen off, it can be less.
2. Return it and owe nothing further, subject to the wear-and-tear and return conditions in the contract.
3. Renew or upgrade, either extending on the same equipment or rolling into a new lease on current-generation equipment. On qualifying Five West leases the upgrade can also happen mid-term, rolling the remaining balance into a new lease.

Two habits protect you. Know the notice window and put it on a calendar. And keep the maintenance records, because a return is inspected against them. More on the mechanics is on our equipment lease page.

What is the best way to finance equipment for a new business?

For a business under two years old, the lease-or-loan question is secondary to getting approved at all. Both structures are available to startups at Five West, selectively: usually 700+ personal credit, real experience in the industry, cash left after the purchase, and a down payment on most files. Within that box, a few patterns hold.

• A lease often closes with less cash out of pocket, which is the constraint that decides most startup deals. Weigh that against the higher total cost if you end up keeping the equipment.
• Buy the equipment that holds value; lease the equipment that does not. A startup with one truck and one trailer usually finances them. A startup with a technology stack usually leases it.
• Pick equipment with a real resale market. Underwriters approve the collateral as much as the borrower on a startup file.
• Shorter is safer. A 36-month structure is easier to approve than a 60- or 84-month one on a new company.

The full picture is in Can a startup get equipment financing? One caution that applies to new and established businesses alike: paying cash for equipment to avoid the choice altogether is usually the most expensive option of the three, because it spends the working capital that carries the business through its first slow quarter.

When does a sale-leaseback beat both?

If you already own equipment free and clear and what you need is working capital rather than a new machine, a sale-leaseback is the third option. You sell the equipment to the funder, lease it straight back, and keep using it; the cash arrives as a lump sum and the payments run up to 60 months with no prepayment penalty. It is how contractors and shops turn a paid-off excavator or press into a line of working capital without a bank line or a blanket lien. We have written about how it works for excavation equipment, cranes, molding presses, and EDMs and grinders.

How to decide in five questions

1. Will I still be using this equipment a year after the last payment? Yes: finance it. No, or not sure: price both.
2. Will the next generation of this equipment make mine hard to sell? Yes: FMV lease. No: finance it.
3. Can my business use a full Section 179 deduction this year? Yes: ownership is worth more. No, or my income is thin: leasing loses less.
4. Is the monthly payment or the total cost the constraint? Payment: lease. Total cost: finance.
5. Do I need an exit? A contract that might not renew, a location you are testing, a pilot line: lease it and keep the return option.

If the answers split, run both structures on your actual equipment at your actual credit tier and look at the gap. Most owners find that the payment difference is modest and the total-cost difference is decided entirely by question one.

The bottom line

An equipment loan, whether it is called an EFA or a $1 buyout lease, is the cheaper way to own equipment you will keep, and it gives you the Section 179 deduction this year. A fair market value lease is the cheaper way to use equipment you will replace, and it trades a slightly higher lifetime cost for a lower payment and a way out. The 10% option sits between them. Around 82% of businesses finance their equipment in some form, according to the Equipment Leasing & Finance Foundation, and the ones that get the structure right are the ones that matched it to how long they would actually run the machine.

Frequently asked questions

Is it better to lease or finance equipment for a small business?

Finance it if you will keep the equipment past the term and can use the Section 179 deduction; lease it on a fair market value lease if the payment, an upgrade path, or a clean exit matters more than ownership. On a $75,000 machine at 9% over 48 months the loan payment is about $1,866 and the FMV lease payment about $1,606, and buying at the end of the lease costs roughly $2,500 more than owning from the start.

Can you take Section 179 on leased equipment?

Only if the lease is really a purchase in the eyes of the IRS, which is the case for a $1 buyout lease and usually a 10% purchase option. On a true fair market value lease the funder owns the equipment and takes the depreciation; you deduct the lease payments as rent instead. The 2026 Section 179 limit is $2,560,000, phasing out above $4,090,000 of purchases.

Does an equipment lease require a down payment?

Often not, which is one reason leases appeal to cash-tight businesses. Many leases collect the first payment, or the first and last, at signing rather than a percentage down. Equipment loans on new dealer equipment commonly close with 0% to 10% down; used and private-party equipment more often needs 10% to 25%, and startup files usually include a down payment under either structure.

Is an equipment finance agreement the same as a loan?

Functionally, yes. An EFA is a loan secured by the equipment: you own it from day one, the funder files a UCC lien, and the payments amortize the full price to zero over 24 to 84 months. It is documented as a finance agreement rather than a promissory note, but the economics and the tax treatment are those of a purchase.

Are equipment lease payments tax deductible?

On a true lease, generally yes, as an ordinary business expense in the year you pay them. On a $1 buyout lease or other conditional sales contract the payments are not deductible as rent; instead you depreciate the equipment, usually through Section 179 or bonus depreciation, and deduct the interest portion of the payments. Confirm the treatment of your specific agreement with your tax advisor.

Can I lease used equipment?

Yes. New, used, and refurbished equipment are all leased and financed regularly, from dealers, auctions, and private parties. Used equipment is underwritten on its remaining useful life, so the term may be shorter, and a fair market value structure is easiest to get on equipment with a deep resale market.

Does an operating lease stay off the balance sheet?

Not anymore for companies that prepare GAAP financial statements. Under FASB ASC 842, leases longer than 12 months are recorded as a right-of-use asset and a lease liability whether they are finance or operating leases. The old 75%-of-life and 90%-of-value tests now only help classify the lease, not keep it off the books. For a cash-basis business that does not produce GAAP statements, the accounting label changes nothing about the payment or the tax result.

Keep reading

More on structure, tax, and what underwriting looks at.

Financing structureLease vs. buy for imaging equipmentWhere the FMV lease earns its keep: technology that turns over faster than it wears out. Tax strategyWhat is Section 179?The 2026 limits, what qualifies, and why financing does not change the deduction. Capital strategyThe economics of paying cash vs. financing equipmentPaying cash is not free.

On the siteEquipment leaseEquipment financeSection 179 calculatorConstructionMachine tools

This article is general information about commercial equipment financing and is not a commitment to finance, and it is not tax or accounting advice. All financing is subject to credit approval and underwriting. Rates, terms, and approval depend on the complete business and credit profile.