Equipment Loan vs Equipment Lease: Pros and Cons Explained

Equipment Loan vs Equipment Lease: Pros and Cons Explained

When we talk to business owners in Dallas, the conversation about acquiring new equipment almost always starts with the same dilemma: “Do I pay for it now, or pay for it later?” You want the latest excavators or commercial ovens to grow your revenue, but you also need to keep enough cash in the bank to handle payroll and the unexpected.

We see this tension every day. Equipment financing is rarely just about getting a machine; it is about managing your cash flow while positioning your company for growth. Whether you run a construction firm in Plano or a restaurant in Deep Ellum, the choice between a loan and a lease will fundamentally shape your balance sheet for years to come.

Let’s break down the data, the 2026 tax updates, and the specific reasons you might choose one path over the other.

Equipment Loans: The Path to Ownership

An equipment loan functions much like a standard auto loan. You borrow money to pay for the asset, and you pay it back over time with interest. Our clients often choose this route when they want to build equity and plan to use the equipment for 5, 10, or even 15 years.

The Core Numbers for 2026

From what we are seeing in the current market, these are the benchmarks you should expect:

• Interest Rates: Strong credit profiles (700+ FICO) are seeing rates between 6% and 10%. If your business is newer or has challenged credit, rates typically range from 12% to 20%.
• Down Payment: Most lenders require 10% to 20% down. On a $100,000 piece of machinery, you will need $10,000 to $20,000 cash upfront.
• Collateral: The equipment itself secures the loan. This often means you don’t need to pledge personal assets or real estate.

Why You Would Choose a Loan

Ownership offers a distinct psychological and financial advantage. Once you make that final payment, the asset is yours free and clear. You can sell it, trade it in, or run it into the ground without asking anyone for permission. This option is ideal for assets that hold their value well, such as heavy yellow iron (construction equipment) or commercial trucks.

Equipment Leases: The Flexibility Play

Leasing is essentially renting with a variety of end-term options. You pay for the use of the equipment rather than the equipment itself. We find this option is popular among businesses that rely on technology or machinery that depreciates quickly.

Understanding the Lease Types

Not all leases are the same. You generally have two main structures to choose from:

1. Capital Lease ($1 Buyout): This is a “loan in disguise.” You make monthly payments, and at the end of the term, you buy the equipment for $1. It is best if you want ownership but need slightly easier approval standards than a bank loan.
2. Operating Lease (FMV): This is a true rental. Payments are lower because you are only covering the depreciation during your term. At the end, you can return the equipment or buy it for its Fair Market Value (FMV).

Important Insider Tip: Many business owners assume operating leases are automatically “off-balance sheet.” Under the accounting standard ASC 842, most private company leases longer than 12 months must now appear on your balance sheet as a liability. Check with your CPA, as the old loophole for hiding debt has largely closed.

Critical Comparison: Loan vs. Lease

We created this comparison to highlight the differences that actually impact your daily operations.

Feature	Equipment Loan	Equipment Lease
Primary Goal	Ownership & Equity	Cash Flow & Flexibility
Upfront Cash	High (10-20% Down)	Low (First & Last Payment)
Monthly Cost	Higher (Paying Principal + Interest)	Lower (Paying for Usage only)
Early Exit	Easy (Pay off remaining principal)	Difficult (Must pay all remaining payments)
Obsolescence	Your Risk (You own the old tech)	Lessor’s Risk (You just return it)
Tax Impact	Depreciation + Interest Deduction	Payments 100% Deductible (usually)

The “Early Exit” Trap

We always warn our clients about the flexibility myth. While leasing is flexible at the end of the term, it is very rigid during the term. If you take out a 5-year lease and want to upgrade in year 3, you typically must pay every remaining payment to get out of the contract. With a loan, you simply pay off the remaining principal balance, which is often much cheaper.

The Tax Game Changer: Section 179 & Bonus Depreciation

Tax incentives are often the deciding factor for our clients. For the 2025 and 2026 tax years, the rules have become incredibly favorable for business owners purchasing equipment.

The 2025/2026 Limits

• Section 179 Limit: You can deduct up to $2,500,000 of the purchase price immediately.
• 100% Bonus Depreciation: This is the big news. The “One Big Beautiful Bill Act” effectively reinstated 100% bonus depreciation for 2025 and 2026. This allows you to deduct the full cost of eligible property in the first year, even if you exceed the Section 179 spending caps.

Strategic Insight: Using a loan to buy equipment can create a positive cash flow event. If you buy a $100,000 machine with $0 down (using specific financing) and deduct the full $100,000 in year one, your tax savings might actually exceed your first year of payments. You essentially get the equipment and a tax refund before you’ve paid off the asset.

Real-World Dallas Scenarios

We have applied these principles to local businesses to see how the numbers play out in practice.

Scenario A: The Construction Contractor

A site preparation company in Frisco needs a new bulldozer costing $250,000.

• Recommendation: Equipment Loan.
• Why: A bulldozer has a useful life of 15+ years. By using a loan, they lock in a fixed cost. Once paid off in 5 years, that machine generates pure profit for the next decade. Plus, the resale value remains high, giving them equity they can cash out later.

Scenario B: The Medical Practice

A dental clinic in Uptown needs new 3D imaging scanners.

• Recommendation: Operating Lease.
• Why: Medical tech evolves rapidly. In 5 years, this scanner will be obsolete. Leasing ensures they have the best tech now for a low monthly payment. When the lease ends, they send the old unit back and get the new model. They avoid the hassle of trying to sell outdated electronics.

Scenario C: The Start-Up Restaurant

A new fusion spot in Bishop Arts needs a full kitchen build-out.

• Recommendation: Hybrid Approach.
• Why: We often suggest leasing the dishwasher and ice machine (high maintenance, short life) while using a loan for the vent hood and walk-in cooler (long life, built into the building). This balances cash preservation with long-term asset building.

Making Your Decision

Before you sign any papers, ask these four questions to clarify your position:

1. Will this equipment be obsolete in 3 years? If yes, lease it.
2. Do I have 20% cash on hand for a down payment? If no, look at leasing or SBA financing.
3. Is my credit score above 680? If yes, a bank loan offers the cheapest cost of capital.
4. Do I need the tax write-off this year? If yes, a loan (or a Capital Lease) combined with Section 179 is your best tax shelter.

Get Expert Guidance

Choosing between a loan and a lease is not just a math problem; it is a business strategy decision. At Equipment Financing Dallas Pros, we help you run the numbers for your specific situation so you can move forward with confidence.

Our team can provide side-by-side comparisons of loan vs. lease quotes for your next purchase.

Contact us today to discuss your equipment needs and find the financing structure that keeps your cash flow healthy.