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.