Equipment Leasing vs. Financing: What's the Difference?

Equipment Leasing vs. Financing: What's the Difference?

Working in the life sciences requires specialized lab equipment for R&D, whether it involves drug discovery, manufacturing a medical device, or creating diagnostics. But using working capital or cash reserves to purchase lab equipment might not make sense at the moment.

The instruments powering this industry are generally expensive, which means you’re stuck paying high upfront costs every time you buy a new piece of equipment. Always purchasing with cash can be detrimental to your business financially. Instead, you might consider financing or leasing what your lab needs.

Equipment leasing and equipment financing are two different ways you can acquire new lab equipment, however, there are some differences between the two. Most notably, an equipment loan, which is a type of financing, has different characteristics—meaning it’s structured differently—than an equipment lease. Depending on your current situation, certain characteristics will be more attractive.

In this article, we will review:

  • Equipment leasing and equipment financing definitions
  • Types of equipment leases and equipment financing options
  • The pros and cons of equipment leasing vs. equipment financing

This overview should give you a better understanding of financing, leasing, and their differences. With a stronger understanding of the two topics, you’ll be more prepared to make the right decision for your business when it comes time to move forward with a contract from a lender or leasing company.

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What Is Equipment Leasing?

Equipment leasing is a type of financing used to rent a piece of equipment for a specific time, rather than purchase it outright. It falls under the umbrella of equipment financing, but it is considered different from an equipment loan, which we cover below.

While a loan involves borrowing money from a lender to purchase equipment, an equipment lease involves periodic payments that go towards the use of the equipment. In other words, a loan (associated with financing) allows you to buy equipment and become the owner of that instrument, while a lease allows you to rent the instrument instead. This means leases do not involve the transfer of ownership at the commencement of the lease or during the lease term.

However, in general, there are a few options available to the lessee at the end of the term, including a purchase option.

If the purchase option is exercised at the end of the lease term, the lessee will be opting to buy the equipment at the fair market value, and will receive actual ownership rights to the equipment. (We say ”actual ownership rights” because capital leases—known as finance leases under ASC 842—are treated like a purchased asset for accounting purposes. More on that here.)

What Is Equipment Financing?

Equipment finance, or equipment financing, is an umbrella term that describes an asset-based loan or lease that a company uses to acquire the essential equipment it needs to operate.

Depending on your needs, you will either pay for the equipment in one go using a loan, and then pay the loan back over time, or you will make monthly lease payments until the lease has been paid in full.

If you decide to use a loan to finance the equipment purchase, you will secure that loan through a lender—either an individual, public or private group, or financial institution—and buy the equipment with the funds provided. There are different types of loans available, which we will cover later.

The lender can potentially provide 100% of the funds the borrower needs to purchase the equipment, however, in some cases, they may require a down payment. That down payment can range from 10-20% and as high as 30%. If the lender will cover most, but not all, of the equipment purchased, it’ll be up to you to cover the rest of the upfront costs.

Your repayment period will differ depending on how much you‘re borrowing and the creditworthiness of your company underwrite. In some cases, the repayment period can be as short as 36 months. In others, it can be spread out over 10 years. Each payment will include interest, principal, and any other fees, according to the loan terms.

Loans can include burdensome terms, as many lenders will establish a lien or personal guarantee on the equipment in case you default on your loan payments. Additionally, this means the equipment itself will act as the collateral for the loan in case you can’t pay back the lender.

Equipment Leasing vs. Financing

Although equipment leasing is a type of financing, it is different from a loan. When you lease, you pay for the equipment for a specific period under a lease agreement. In contrast, a loan allows you to purchase the equipment outright.

Because you’re not buying a piece of lab equipment and paying in full, leasing lowers the upfront cost of procuring that instrument and reduces the impact of depreciation on your company’s bottom line.

The monthly payments help to spread the cost of equipment out over time, and are potentially 100% tax deductible if your lease is classified as an operating lease.

These are significant factors to consider, as equipment leasing may be a better option for business owners who want to preserve working capital, maintain positive cash flows, and better manage the costs of maintenance and repairs on new equipment.

Furthermore, unlike leases, loans provided by a lender often come with some significant downsides and burdensome terms.

For example, banks are heavily regulated, as they rely on depositors’ money to fund their loans, which makes sense because banks simply can’t risk losing other peoples’ money or increased regulatory crackdowns.

If a lab does get approved for financing from a bank, they’ll need to account for lengthy amortization schedules with complex long-term and short-term debt calculations, especially when interest rates are variable based on financial markets.

Terms of the loan can also be quite burdensome. Because banks need to protect their depositors’ funds at all costs, laboratories can end up paying the price. For instance, a term loan can include personal guarantees, debt covenants, collateral (such as IP pledges), and liens against your company, as well as inflexible payment plans.

Seeing a full breakdown of equipment leasing vs. traditional financing can help you decide which option might be best for your business.

Types of Equipment Leases

While there may technically be a few different types of equipment leases, you will most likely only deal with these two terms: operating leases and capital leases. These lease classifications are defined under the accounting standard, ASC 842, Leasing, and have their own characteristics.

In Excedr’s case, we offer operating leases that range from 2 to 5 years in length. Our lease underwriting process takes a holistic approach in its considerations, and is much faster than traditional financing options, meaning we can get you the equipment you need much quicker. We provide equipment leases for specialized and general lab equipment, from analytical instruments and sequencers to bioreactors and microscopes. We do not provide loans.

Let’s quickly review the two most common lease classifications below. If you'd like to learn more, you can read our article on different types of equipment leases.

Operating Lease

An operating lease is a type of lease agreement between a lessor and a lessee that grants the lessee the right to use the equipment for a specific period.

It is accounted for as a rental, and does not involve the transfer of ownership rights during or after the lease term. It can, however, include a fair market value (FMV) purchase option, where the lessee has the right, but not the obligation, to purchase the equipment at the end of the lease for a price that reflects its then-current worth.

Capital Lease

A capital lease, as you can guess, is also a type of lease agreement between a lessor and lessee that grants the lessee the right to use the equipment.

However, unlike an operating lease, a capital lease (or finance lease, as it is referred to now) is accounted for as a purchased asset and gives you all the rights associated with ownership during the lease term.

Accounting for these classifications used to be much different under the old accounting standard, ASC 840. Instead, under the new lease accounting standard, ASC 842, accounting for each type is much similar. Learn more about operating leases and capital leases in our article, Operating leases vs. Capital leases.

Types of Equipment Financing

It should be noted that Excedr does not offer equipment loans, we offer leasing solutions through our leasing program. Nonetheless, it’s important to cover the other financing options you can use to procure equipment.

There are several types of equipment financing options available. Some of these options include:

  • Equipment loans
  • SBA loans
  • Lines of credit
  • Credit cards
  • Alternative lending

While each option provides you with the funds necessary to buy equipment and other business-related assets, there are some differences. Let’s review these differences below.

Equipment Loans

When someone mentions equipment financing, they’re generally referring to an equipment loan. To secure an equipment loan, you apply for one through a lender who underwrites your business and decides whether you qualify or not. It’s possible to get up to 100% financing for the instrument, however, some lenders will require a down payment, which can get as high as 30% in some cases.

Repayment periods vary, but often fall range from 3 to 10 years. However, some loans, such as those offered through the SBA, can be longer (10 to 25 years).

Depending on the lender, you will either experience a relatively streamlined underwriting process, or one that is much longer in length, such as when you deal with a traditional bank. This can be difficult when time isn’t on your side, and important research is on hold as you figure out how to acquire the equipment you need for the next step in experiments or development.

Although a perfect credit score isn’t a prerequisite, you will still need to have strong personal credit (typically 600 or above) to secure a loan. Good credit is one of the most important requirements you will need to meet.

In addition, you will likely need to have been in business for several years, have a solid business plan the lender can use to understand your business, and have both personal and business financial statements readily available.

These lender requirements can make securing an equipment loan difficult, even if they  don’t include the burdensome terms lenders often include.

Term Loans

erm loans aren’t specifically a type of equipment financing. Businesses can use them to borrow money to purchase business-related fixed assets, and even offset non-equipment costs. They can be used to finance the purchase of equipment as well. In this way, term loans are a source of flexible working capital that can be deployed as necessary for planned and unplanned expenses.

The use of term in “term loan” simply signifies that there is an agreed-upon time the loan will be paid back in full. For example, a loan that has been predefined as a five year loan is considered a type of term loan. There are different types of term loans offered, which vary in length and repayment schedule.

In general, term loans can be a viable option for businesses that have been around longer, and often allow a company to borrow more than the typical equipment loans that cap out around $250,000. That said, term loans can come with the same terms equipment loans include, making a loan more burdensome than it should be.

SBA Loans

The Small Business Administration (SBA) offers loan programs that support small business owners. Specifically, the organization’s CDC/504 Program can be used by companies to cover equipment purchases, providing long-term, fixed-rate financing for up to $5M that can be spent on business-growth- and job-creation-related fixed assets, which is a larger limit than equipment or term loans offer. The term loans are often longer as well, with repayment terms of 10 and 20 years available.

The CDC/504 program is available to for-profit US businesses with a tangible net worth of less than $15M and average net income of less than $5M after federal taxes for the previous two years.

Like an equipment or term loan, the equipment you purchase serves as collateral and a personal guarantee is also required.

The 504 loan has the longest application, and can take up to 8 weeks to complete the various stages. With a longer approval process, applying for a 504 loan can be a significant disadvantage if you need to purchase equipment in a hurry.

Business Line of Credit

A line of credit (LOC) is a type of credit facility that a financial institution can provide to a borrower that allows the borrower to draw on the LOC whenever the funds are needed.

Like anything, there are advantages and disadvantages to LOCs. If you opt for a line of credit (LOC), you won’t have to repay the loan, instead only paying interest each month. Doing so can be risky however, as the bank may decide to “call the balance” of the LOC, leaving you to scramble to pay back the LOC’s balance.

There are upfront costs that can add up as well. Typically, paying for lab instruments with a credit line will cost about 1% to 2% of the availability on your line of credit, plus any additional costs you may incur for non-utilization.

Another disadvantage is the highly nuanced process of getting approved for a credit line, especially one that revolves (renewing annually). You could be looking at several months of cumbersome underwriting before you are given any indication of approval.

Unlike an operating lease, the tax benefits are not consistently achievable. Cumbersome IRS depreciation rules mean financing your laboratory equipment through the use of a line of credit can be unpredictable.

Depending on IRS tax codes, you may have to depreciate the asset according to the IRS MACRS chart, or you may be able to accelerate the depreciation. It will vary based on current regulations, which may change year to year.

That all said, a reduced credit availability is perhaps the biggest downside to using a line of credit for outfitting your lab. When you buy a fixed asset with a line of credit, you’ll reduce your available credit for any other opportunities that pop up, and limit your future borrowing ability.

Business Credit Card

Compared to other financing options, business credit cards typically have the lowest credit limits. That said, they can still be used to finance an equipment purchase if the purchase is under the card’s limit.

Like a personal credit card, business owners can use a business credit card to earn cash back, points, or even travel miles for your business.

One of the biggest downsides of credit cards is its interest rates and fees. Credit card APRs often run in the double-digits, and it’s likely you will have to pay an annual fee to use the card. Because the APR is so high, your interest payments could significantly outweigh the equipment’s value or the rewards’ value you’re earning if you can’t pay off your purchase soon enough.

One issue you might run into is being told you can’t use a credit card to make payments. This is because some vendors and manufacturers don’t want to take on the merchant fees, and may even pass the cost along to you if they do allow you to pay with a card, as this varies widely. If costs are passed on to you, it could make using a credit card more expensive than other financing options, leasing included.

Alternative Lending

Alternative lending refers to loans that are provided by alternative, or nontraditional, lenders. These companies are typically privately held, online-based businesses that operate like a bank or credit union, but without the ”hang-ups” of traditional financing and lending.

This type of alternative financing is known for its speed, flexibility, and accessibility, unlike many of the traditional financing options, making it a better option for businesses that are in a hurry to purchase lab equipment.

That said, while alternative lenders can be quicker and more flexible, the loans they provide typically come with higher interest rates than bank or SBA loans. It’s important to keep this in mind, as the interest rates can really inflate the total price you’re paying for the equipment.

Leverage the Speed & Flexibility of Leasing

Financing equipment can potentially help your company in a number of ways. We say ”potentially” because taking out a loan or using up a line of credit to procure equipment can put businesses in a less-than-ideal position, one where they enter into an agreement with onerous terms or exhaust their credit by buying equipment outright.

If the financing terms are inflexible and the equipment you need can easily become outdated, this can become a significant issue.

Rather than go through the often bulky and rigid process of loan approvals, lease your lab equipment with Excedr and avoid the burdensome terms associated with traditional financing, while tapping into a flexible and speedy leasing process, staying ahead of the technological curve, and empowering your R&D team.

If you have a piece of lab equipment in mind already, let us know by requesting a lease estimate. Otherwise, get in touch with us to learn more about our leasing program.