You have found the machine. The vendor has sent a quote. Now someone asks how you want to pay for it, and three words come up that sound alike but are not: lease, loan and EFA.
All three spread the cost of equipment over time. All three can get the same machine onto your floor this month. They differ in who owns the equipment, what you pay before it arrives, what the paperwork asks for and what you are left holding when the last payment clears. This post walks through each one, then runs the same purchase through all three so you can see the differences side by side.
The equipment loan
An equipment loan is the structure most people picture first. A bank or other lender lends you the money, you buy the equipment, and the lender takes a security interest in it until the loan is paid.
- You own the equipment from day one. It goes on your balance sheet as an asset, with the loan as a liability.
- A down payment is common. Many banks want you to put some of your own cash into the purchase, and on larger equipment it can be the biggest single cheque in the deal.
- The paperwork tends to be heavier. Banks often want business tax returns, financial statements and sometimes a projection, and some take a blanket lien on business assets beyond the equipment.
- You carry the resale risk. When the machine is worn out or out of date, selling or scrapping it is your job.
A loan makes sense when you plan to run the equipment for its whole working life, you have cash that is not doing anything more useful, or the equipment is part of a larger project a bank is already financing.
The equipment lease
With a lease, the finance company buys the equipment from your vendor and you pay to use it for a fixed term. At American Capital Group that term runs from 18 to 60 months.
What happens at the end depends on the kind of lease:
- Fair market value (FMV) lease. At the end you return the equipment, buy it at what it is then worth, or keep leasing. Because you are paying for use rather than for the whole machine, this usually has the lowest payment of any structure.
- FMV with a purchase option. The same three choices, but the buyout is capped and agreed at signing, so you know what keeping it would cost.
- Nominal or $1 buyout lease. Written so that buying the equipment at the end is a formality. The payment is higher, because you are paying toward ownership the whole way through.
Leases are popular when the equipment changes faster than it wears out, when cash is worth more inside the business than in a down payment, or when you want freight, installation and training financed together with the machine.
The equipment finance agreement (EFA)
An EFA sits between the two. It is loan-shaped: you own the equipment from the first day, the finance company holds a security interest until the end of the term, and there is no end-of-term decision because the equipment is already yours.
The difference from a bank loan is mostly in who writes it and how. An EFA is written by an equipment finance company, so it is usually decided on the equipment and the business rather than on a full bank credit package, and it can come with the same features as a lease:
- No down payment, with two advance payments due at signing instead.
- Soft costs such as freight, rigging and installation written into the same agreement.
- Seasonal, step-up or deferred payment schedules for businesses whose income is not even through the year.
If you already know you want to own the equipment, an EFA gives you ownership without the bank-style down payment and paperwork.
A worked example
Here is one purchase run through all three structures. We have used amount bands rather than exact figures, because the actual payment on any deal depends on the term, the credit tier and the structure chosen, and a made-up number would mislead more than it helps.
The purchase: an established business is buying a used machine with an invoice in the $50,000 to $75,000 band, plus delivery and installation in the $2,500 to $5,000 band. The owner expects to run it for about five years.
| Bank loan | FMV lease | EFA | |
|---|---|---|---|
| Who owns it during the term | You | The finance company | You |
| Down payment | Often required. On this purchase, a bank asking for 10% to 20% down means roughly $5,000 to $15,000 out of pocket | None. Two advance payments due at signing | None. Two advance payments due at signing |
| Delivery and installation | Usually paid separately in cash | Can be written into the agreement | Can be written into the agreement |
| Paperwork | Often tax returns and financial statements | One-page application in this band | One-page application in this band |
| Monthly payment, same term | Paying toward ownership | Lowest of the three | Paying toward ownership |
| At the end | You own it, already | Return it, buy it at fair market value, or extend | You own it, already |
A few things stand out.
Month one looks very different. On the bank loan the business writes a down payment cheque in the $5,000 to $15,000 range, then pays for delivery and installation on top. On the lease or the EFA, the cash out at signing is the two advance payments, and the delivery and installation are folded into the same agreement. On a typical 48- to 60-month term, two advance payments usually come to less than a 10% down payment would.
The monthly figure is not the whole story. The FMV lease will usually show the lowest monthly payment, but at the end you do not own the machine. If you want to keep it, you buy it at what it is then worth. The loan and the EFA cost more each month because every payment goes toward ownership.
The answer depends on the five-year plan. If the owner expects to replace this machine in five years with something newer, the FMV lease keeps the payment down and hands back the resale problem. If the owner expects to run it for ten years, the EFA or the loan makes more sense, and between those two, the EFA keeps the down payment in the business.
Taxes: the structure changes the answer
How the agreement is treated for tax depends on what it is, which is one of the most practical reasons to choose carefully.
- EFA, loan or $1 buyout lease: you own, or will own, the equipment. You can generally depreciate it and may be able to take Section 179 and bonus depreciation in the year it goes into use, even though you are paying for it over time.
- FMV lease: you usually deduct the lease payments as an operating expense instead of depreciating the equipment.
Neither is automatically better. A business that wants a large deduction this year may prefer ownership; a business that wants a steady expense may prefer a true lease. We are an equipment finance company, not a tax advisor, so take the structure to your accountant before you sign.
How to choose
Three questions settle most cases:
- How long will you keep it? Shorter than its working life points to an FMV lease. The whole of its working life points to an EFA or a loan.
- What is your cash worth? If cash in the business earns more than it would save as a down payment, a structure with no down payment wins.
- What do you want at the end? A decision, or nothing to decide? A lease gives you options; an EFA gives you a machine that is already yours.
You can read the long version of this comparison on our lease vs. loan page, and the four lease endings in detail on types of equipment leases.
Talk it through before you pick
You do not have to choose the structure before you call. Tell us what you are buying, roughly what it costs and how long you expect to keep it, and a specialist will show you how it looks as a lease and as an EFA. Getting a quote is free and does not involve a hard credit pull.
Request a free quote, apply online, or call (949) 822-3017.
This post is general information, not tax, legal or accounting advice.
Frequently asked questions
What is an equipment finance agreement (EFA)?
An EFA is a loan-shaped equipment financing contract. You own the equipment from the first day, the finance company holds a security interest in it until the last payment, and there is no end-of-term decision to make. It works like an equipment loan but is usually written by an equipment finance company rather than a bank.
What is the difference between an equipment lease and an equipment loan?
Ownership. With a loan or an EFA you own the equipment from day one and the lender holds a security interest. With a lease the finance company buys the equipment and you pay to use it, then at the end of the term you return it, buy it or keep leasing it.
Which has the lowest monthly payment: a lease, a loan or an EFA?
For the same machine and term, a fair market value lease usually has the lowest payment, because you are not paying toward full ownership. A $1 buyout lease, an EFA and a loan are all paying toward ownership, so their payments are higher.
Do I need a down payment for equipment financing?
It depends on the structure and the lender. Bank equipment loans often ask for a down payment. With American Capital Group there is no down payment on a lease or an EFA: two advance payments are due when you sign, and that is the whole of what you pay up front.
Can I take Section 179 on a lease or an EFA?
Usually on an EFA and a $1 buyout lease, because you own or will own the equipment. With a fair market value lease you usually deduct the lease payments as a business expense instead. How your agreement is treated depends on its terms and your own tax position, so confirm it with your accountant.