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What's the Difference Between a Loan vs a Lease?

posted 7/12/2018 in Business

When it comes to acquiring new equipment, businesses have two options.

You can either secure a loan to purchase the equipment or lease it. The decision to buy or lease will affect many areas of your business's finances and operations so it's important to be educated about the differences between them.

How do my payments affect financing?
Lease - Lease payments either act as rental payments through an operating lease or repayments through a capital lease.
Loan - Your payments are repayments with interest that reduce the principal of your loan.

Will I own the equipment?
Lease – The leasing company owns the equipment during the lease and you pay the equivalent to rental payments.
Loan – During a loan, you assume all ownership responsibility ofyour equipment.

Will I make a down payment?
Lease – No down payment is usually required.
Loan – Loans usually require a down payment. You'll then finance the rest of the equipment cost.

How frequently do I pay?
Lease - You can usually structure your payments to match your cash flow with monthly, seasonal, semi-annual or annual payments.
Loan – You'll generally make a monthly payment.

How does my equipment depreciate and what are its tax implications?
Lease – With an operating lease, you'll make the equivalent of rental payments for your equipment and you can write off the full portion of your lease payments as an expense. With a capital lease, you'll assume liabilities of ownership for accounting purpose but can likely deduct the full amount of your lease payments*.

Loan – You'll claim tax deductions for the interest paid on your loan and since you own the equipment, you'll amortize the equipment over its useful life.

What happens if my equipment becomes obsolete?
Lease – You may be able to regularly trade up your equipment at the end of your lease and structure new financing.
Loan – Because you assume full ownership with a loan, you're left with the equipment and bear the risk of obsolescence.

To be sure you are covering all your bases, we recommend maintaining a strong relationship with your business team - your attorney, your accountant, your lender, and other trusted resources - so you draw on their experience and expertise as you make this important decision.

At Lincoln Savings Bank, we can help you with the lease of new and used equipment. Get started by filling out an application or contact us at leasing@mylsb.com and one of our lending experts will be happy to answer any questions you may have.

Lincoln Savings Bank, Member FDIC

Leases and all related servicing are provided through partnerships with other lending institutions.

*Always consult with your tax professional.

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