Lease, loan or cash? How to compare equipment financing in numbers

Whether leasing, an equipment loan, hire purchase or paying cash is cheapest depends on two things most quotes leave out: what the equipment will be worth when you are done with it and what your own cash is worth to you in the meantime. If you simply add up the payments, cash usually looks cheapest. Once you convert every payment into today’s money (its present value), the options often end up close together, and a lower resale value or a higher cost of money can make a lease or a loan the cheaper choice. The worked example below shows the full calculation for one machine and four ways to pay.

This guide is general education, not financial, tax or legal advice. All amounts in the example are in neutral currency units and are an EXAMPLE, not market prices. National rules are labelled by country. No provider is named or ranked.

How common is equipment financing?

Many businesses do not pay cash for equipment. According to the US trade body ELFA, more than 8 in 10 US companies (82%) use some form of financing when acquiring equipment, and about 57.7% of the $2.3 trillion that US businesses, nonprofits and government agencies invested in plant, equipment and software in 2023 was financed through loans, leases and credit lines. In the UK, members of the Finance & Leasing Association financed a third of investment in machinery, equipment and purchased software in 2025. Across Europe, Leaseurope reports nearly €454 billion of new leasing in 2024, most of it vehicles. These are industry-association figures; they do not show which option is cheaper for you.

The four ways to pay for equipment

Cash purchase

You pay the full price up front, own the equipment, pay for servicing and keep the sale proceeds at the end. No interest, but the cash is gone from the business.

Equipment loan

A lender finances all or part of the price and you repay in instalments with interest and, often, fees. You usually own the equipment from the start, and the lender may take it as security. Some countries have publicly backed routes: in the US, the SBA’s 504 program provides long-term, fixed-rate financing through Certified Development Companies, including for machinery and equipment with a remaining useful life of at least 10 years. In Germany, the state development bank KfW offers the ERP-Förderkredit KMU for small and mid-sized firms and freelancers, which can finance machines and vehicles and is applied for through a commercial bank before the project starts.

Hire purchase (UK), Mietkauf (Germany) and finance leases

These are “pay-it-off” structures. With hire purchase in the UK or Mietkauf in Germany you typically pay a deposit and fixed instalments, and ownership passes to you at the end, often after a small final fee. A finance lease is a close cousin: UK accounting guidance quoted by HMRC defines it as a lease that “transfers substantially all the risks and rewards incidental to ownership of an asset”, whether or not legal title is eventually transferred. In substance, you carry the resale-value risk, as you would if you had bought the equipment.

Operating lease

You rent the equipment for part of its useful life and hand it back. HMRC’s guidance describes an operating lease as one that does not transfer substantially all the risks and rewards of ownership; the lessor depends on the asset’s remaining value at the end. That is the key economic difference: with an operating lease, the leasing company carries the resale-value risk. Some operating leases bundle servicing; many do not. Check the contract.

Lease vs loan vs cash: comparison table

Typical structures only; contracts and labels differ by country.

Worked example: one machine, four ways to pay

EXAMPLE assumptions (not market data):

• A small workshop needs a laser cutter costing 30,000 units and plans to use it for 4 years (48 months).
• Expected resale value after 4 years: 9,000 units (30% of the price).
• Servicing if you own it: 800 units per year. Insurance is assumed to be the same in every option and is left out. Taxes are left out of this part.
• Loan: 30,000 at 8% a year over 48 months plus a 300 arrangement fee. Monthly payment = P × i ÷ (1 − (1 + i)^−n), with i = 0.08 ÷ 12 and n = 48, which gives 732.39.
• Hire purchase / Mietkauf: 3,000 deposit, the remaining 27,000 at 9% over 48 months (671.90 a month), plus a 100 option fee at the end.
• Operating lease: 650 a month for 48 months, servicing included, equipment returned at the end.

Step 1: just adding it up

Total paid minus what you get back:

Cash is lowest and beats the lease by 7,000 units. But this sum treats a unit paid today exactly like a unit paid in four years.

Step 2: convert everything into today’s money

A thousand units today is worth more to you than a thousand units in four years, because today’s money can pay down a debt, cover a slow month or earn interest. Discounting converts future payments into their value today, the present value (PV):

PV = amount ÷ (1 + r ÷ 12)^m

where r is your annual discount rate (the cost of your money: what your cash would otherwise earn, or what you would pay to borrow it) and m is the number of months until the payment. At 7% a year, 9,000 units received in 48 months are worth 9,000 ÷ (1 + 0.07 ÷ 12)^48 ≈ 6,808 today. For more on why future money buys less, see inflation and purchasing power and nominal vs real values.

Discounting every payment in the example at 7% a year (monthly payments in arrears, servicing at the end of each year, resale at month 48):

Cash is still cheapest, but its lead over the lease shrinks from 7,000 to about 1,256 units. All four are within about 5% of each other, so small changes in the assumptions can change the order.

What flips the answer: resale value and the cost of your money

Dial 1: the resale value

Equipment becomes obsolete: newer models arrive, software support ends, or your work changes. If the laser cutter is worth only 3,000 after four years (still discounting at 7%):

The lease does not change, because you hand the equipment back; it now wins by more than 3,000 units. In this example the break-even resale value between cash and the operating lease is about 7,340 units. Expect more than that and cash wins; expect less and the lease wins. Part of every operating-lease payment is effectively a premium for protection against obsolescence.

Dial 2: the cost of your money

Seven percent assumes cash is fairly cheap for the business. If paying 30,000 today means running an overdraft at 15%, your cost of money is closer to 15%. With the original 9,000 resale value:

Cash moves from first to last. In this example the loan beats cash once your cost of money is above about 8.5%, roughly the loan’s own cost including the fee. Borrowing at 8% to keep cash that is worth 15% to you can be a good trade; borrowing at 8% while the cash earns 2% usually is not. The model cannot show the value of liquidity itself: a cash buffer that carries the business through a slow month can matter more than the difference in the table. See cash flow for the timing side.

Maintenance, insurance and the costs quotes leave out

Before you compare, write down who pays for:

• Servicing and repairs, including parts and call-out charges.
• Insurance, and whether the contract requires a specific level of cover.
• End-of-term costs: option or purchase fees, return condition rules, collection and excess-wear charges.
• Early exit: what happens if you need to end the contract, sell the equipment or upgrade before the term ends.
• Fees: arrangement, documentation and administration fees, and whether they are paid up front or financed. The borrowing costs guide explains why a fee financed into the balance costs more than one paid up front.

If a lease includes servicing, add expected servicing to the buy options, as the example does.

Tax and accounting: simplified regional notes

Tax can change the ranking because a deduction today is worth more than the same deduction spread over several years. Fast write-offs tend to favour the buying options. The notes below are simplified, checked in October 2026, and leave out many conditions. Check with a tax adviser where you live.

United States

• Section 179: for tax years beginning in 2026, a business can elect to expense up to $2,560,000 of qualifying property, reduced dollar for dollar once qualifying property placed in service during the year exceeds $4,090,000 (IRS Rev. Proc. 2025-32).
• Bonus depreciation: a permanent 100% additional first-year depreciation applies to qualified property acquired after January 19, 2025 (IRS guidance on Notice 2026-11).

United Kingdom

• Annual Investment Allowance (AIA): up to £1 million a year of most plant and machinery can be deducted in full; business cars are excluded (GOV.UK).
• Hire purchase: once you start using the item, you can claim for the payments under the contract, but not for the interest payments (GOV.UK).
• Leases: where the lessee is not entitled to capital allowances, it gets “a deduction for rental payments in the normal way” (HMRC CA23810). Long funding lease rules can change who claims allowances.

Germany

• Depreciation (AfA): equipment is generally depreciated over its useful life. For movable assets acquired after June 30, 2025 and before January 1, 2028, declining-balance depreciation of up to 30% a year is allowed, at most three times the straight-line rate (§ 7 (2) EStG).
• Low-value assets: items costing up to €800 net can be deducted in full in the year of purchase (§ 6 (2) EStG).
• Leases: under the finance ministry’s 1971 decree on full-payout leases of movable assets, whether the asset is attributed to the lessee or the lessor depends among other things on whether the fixed lease term lies between 40% and 90% of the asset’s normal useful life (secondary source: Haufe).

Accounting

Under IFRS 16 (international standard, effective since 2019), lessees recognise a right-of-use asset and a lease liability for most leases longer than 12 months, unless the asset is of low value. Many small businesses use local rules instead (for example HGB in Germany, FRS 102/105 in the UK or US GAAP), so “off balance sheet” claims need checking for your reporting framework.

How to compare equipment finance offers where you live

1. Use the same horizon for every option, for example the 4 years you expect to use the equipment.
2. List every payment and its timing: deposit, instalments, fees, end-of-term charges, servicing and insurance where they differ.
3. Estimate the resale value twice: a realistic number and a pessimistic one. Run both.
4. Discount at your real cost of money, then try a higher rate. If the winner changes, the decision depends on that assumption.
5. Ask who pays when it breaks, who insures it, and what an early exit costs.
6. Check public programmes and official rules: in the US the SBA 504 page and IRS guidance; in the UK the GOV.UK capital allowances pages; in Germany the KfW SME loan page and an adviser for AfA and lease attribution. In other countries, look for the national tax authority’s guidance on capital allowances or depreciation and any state development bank.

The lease vs buy calculator runs this comparison with your own price, rates, terms, resale value and discount rate.

Common mistakes

• Comparing monthly payments only. A lower payment can come from a longer term, a balloon at the end or a smaller share of the price being financed. The car loan example shows the same trap for consumers.
• Ignoring the resale value, or assuming it with false confidence. It is often the biggest single number after the price.
• Using the wrong discount rate. If cash is scarce and you would otherwise borrow expensively, a low rate makes cash look better than it is.
• Mixing in tax savings without checking eligibility. Allowances have limits, exclusions and conditions.
• Forgetting the buffer. Spending all available cash on one machine can leave the business exposed even when the spreadsheet favours cash.

Questions people ask

Is it better to lease or buy equipment?

Neither in general. In the example, cash was cheapest at a 7% cost of money and a 9,000 resale value, but the operating lease won at a 3,000 resale value or a 15% cost of money. Run your own numbers with realistic and pessimistic assumptions.

What is the difference between a finance lease and an operating lease?

A finance lease transfers substantially all the risks and rewards of ownership to you, even if you never hold legal title. An operating lease does not; the lessor keeps the resale-value risk and you return the equipment at the end.

What is the difference between hire purchase and leasing?

With hire purchase (UK) or Mietkauf (Germany) you normally become the owner after the final payment. With a lease you usually do not, although some finance leases offer ways to keep using or buy the asset. Tax treatment differs too, see the regional notes above.

Which discount rate should I use?

Use the cost of money for your business: the return you would give up by spending the cash, or the rate you would pay to borrow if you did. If you are unsure, test two rates, for example your savings rate and your overdraft rate.

Is an equipment loan the same as a working capital loan?

No. Working capital financing covers short-term operating needs such as payroll or stock. Equipment financing pays for a long-lived asset, and the asset itself often secures the loan or lease. Matching the financing term to the asset’s useful life is the usual starting point.