How equipment lease vs equipment finance agreement (EFA) differs?
Equipment leasing and Equipment Finance Agreements (EFAs) are two common methods businesses use to acquire equipment. Here’s a comparison of their key differences:
Ownership
– Equipment Lease: The leasing company (lessor) retains ownership of the equipment. The lessee has the right to use the equipment for a specified period in exchange for regular payments. At the end of the lease term, the lessee may have options to purchase the equipment, renew the lease, or return the equipment.
– Equipment Finance Agreement (EFA): The borrower (user of the equipment) owns the equipment from the outset. The lender provides the financing, and the borrower repays the loan over a set period. Once the loan is paid off, the borrower retains full ownership with no further obligations.
Payment Structure
– Equipment Lease: Payments are typically lower than those for an EFA because the lessee is paying for the use of the equipment rather than for ownership. Lease payments may include maintenance and other services depending on the lease agreement.
– EFA: Payments are generally higher because the borrower is financing the full purchase price of the equipment. Payments are typically fixed over the Loan term, and the borrower is responsible for maintenance and other related costs.
Financial Reporting
– Equipment Lease: Operating leases (common type) may not appear on the balance sheet as liabilities, making them an attractive option for businesses looking to improve their financial ratios. However, finance leases (another type) are treated more like debt and are recorded on the balance sheet.
– EFA: EFAs are treated like a loan, with the equipment recorded as an asset and the loan as a liability on the balance sheet.
Tax Implications
– Equipment Lease: Lease payments are generally tax-deductible as business expenses, providing a potential tax benefit. The lessor typically claims depreciation on the equipment.
– EFA: Interest payments on the loan may be tax-deductible. The borrower can also claim depreciation on the equipment, which can provide tax benefits over time.
End-of-Term Options
– Equipment Lease: At the end of the lease term, the lessee may have several options, including purchasing the equipment at a predetermined price, renewing the lease, or returning the equipment.
– EFA: Since the borrower owns the equipment from the start, there are no end-of-term options to consider. The equipment belongs to the borrower once the loan is fully repaid.
Flexibility and Risk
– Equipment Lease: Leases often offer more flexibility, allowing businesses to upgrade equipment more easily at the end of the lease term. However, the lessee may face penalties for early termination.
– EFA: EFAs generally have less flexibility since the borrower owns the equipment. The borrower assumes more risk, including potential depreciation or obsolescence of the equipment.
Two have a lot in common that difference. It’s all the type of equipment loan you’re looking for, state regulation and your current financial situation. Please always consult with your CPA before making any final decision. We don’t provide any account or legal advise. We attempt to provide you a loan product through education.
– Equipment Lease: Ideal for businesses looking for lower upfront costs, potential tax benefits, and flexibility in equipment management. Suitable for equipment that may need frequent updating or replacement.
– Equipment Finance Agreement (EFA): Suited for businesses that prefer ownership, can manage higher monthly payments, and want to build equity in the equipment. Good for equipment with a long useful life and less risk of becoming obsolete.
Understanding these differences helps businesses choose the most suitable financing option based on their financial situation, tax considerations, and equipment needs.
10 Reasons Why Equipment Finance Agreement is Better than a Lease
An Equipment Finance Agreement (EFA) offers numerous benefits to businesses looking to acquire new or used equipment. Here are some key advantages:
1. Ownership of the Equipment
- Immediate Use: Businesses can use the equipment right away while making regular payments.
- Asset on Balance Sheet: The equipment is recorded as an asset on the company’s balance sheet, which can improve the company’s financial position and provide tax depreciation benefits.
2. Flexible Terms
- Customizable Payment Plans: EFAs often offer flexible payment terms, allowing businesses to select payment schedules that best fit their cash flow needs.
- Varied Term Lengths: Businesses can choose from a range of term lengths, typically from 12 to 72 months, to match their financial strategies.
3. Preservation of Cash Flow
- Minimal Upfront Costs: EFAs typically require minimal down payments, allowing businesses to preserve cash for other operational needs.
- Spread-Out Payments: The cost of the equipment is spread over the term of the agreement, making it more manageable.
4. Tax Benefits
- Section 179 Deduction: Businesses may be able to take advantage of Section 179 of the IRS tax code, which allows them to deduct the full purchase price of qualifying equipment financed under an EFA.
- Depreciation: The equipment can be depreciated over its useful life, providing additional tax benefits.
5. Fixed Interest Rates
- Predictable Costs: EFAs often come with fixed interest rates, which provide predictable monthly payments and help with budgeting.
- Protection Against Rate Increases: Fixed rates protect businesses from interest rate increases over the term of the agreement.
6. Fast Approval Process
- Streamlined Application: EFAs typically have a simpler and faster approval process compared to traditional loans.
- Quick Access to Equipment: Businesses can acquire the necessary equipment quickly, minimizing downtime and enhancing productivity.
7. No Prepayment Penalties
- Flexibility in Payments: Many EFAs do not have prepayment penalties, allowing businesses to pay off the agreement early if their financial situation improves.
8. Improved Cash Flow Management
- Predictable Payments: Regular, predictable payments make it easier for businesses to manage their cash flow.
- Budgeting: Knowing the exact amount and timing of payments helps in better budgeting and financial planning.
9. Potential for 100% Financing
- Inclusive Financing: EFAs can often finance 100% of the equipment cost, including soft costs like installation, delivery, and training.
- No Additional Costs: This comprehensive financing ensures businesses don’t have to pay additional costs out of pocket.
10. Enhanced Purchasing Power
- Access to Better Equipment: With the ability to finance, businesses can afford higher-quality or more advanced equipment than they might be able to purchase outright.
- Competitive Advantage: Access to better equipment can improve efficiency and competitiveness in the market.
An Equipment Finance Agreement provides a practical and flexible financing option for businesses needing to acquire essential equipment. It offers the benefits of ownership, tax advantages, predictable payments, and enhanced cash flow management, making it an attractive choice for many businesses.
Apply Online
1. ONLINE APPLICATION: You can fill out our application, upload and authorized us to process your application. We do soft-inquiry, and our lender will do hard inquiries once you are approved for Equipment Financing only.
2. Equipment Invoice or Quote for the truck or equipment you want to buy. Multiple vendors accepted. We’ll lump them into one monthly payment for you. We’ll accept bill-of-sale for some private sale.
3. Banks statements (3-4 months) – Proof income, proof of banking, and proof funds availability in case down payment is needed and to match for ACH Payment Drafting – as an auto pay.
