Loans, Leases, And Equipment Finance Agreements

Loans, Leases, and Equipment Finance Agreements: What is the Difference between them?

The difference between leases and loans is relatively straightforward. In this section, we’ll describe the main features of leases, loans and finance agreements and describe one of the main differences, that is ownership.

Also, note that leases are mainly 2 types: 

1.operating leases, and 

2.capital lease. 

Here, when we say “lease,” we mean an operating lease. Capital leases (such as $1 buyout lease), and equipment finance contracts are essentially same.

Loans:

Loan agreements are used to borrow money for the purchase of equipment/ Asset, to acquire real estate property, or to finance receivables and inventory. With the loan, you typically borrow a portion of money you need to purchase an equipment and make up the difference with your finances in the form of down payment. 

The debt will appear on the balance sheet, and you may expense an interest and depreciation on monthly basis.

Loan agreements are between a lender and, the borrower. A loan agreement details how much you borrowed and at rate of interest you will pay it back over a set period of time. 

With a traditional loan or payday loan  the principal and interest will be varying from month to month depending on loan term(how quickly you are paying the loan back).

Ownership: Your business owns the equipment/asset purchased with the loan (borrowed money).

Leases Are Agreements for the Use of the Equipment

Operating leases are rental contracts for the use of an equipment. With a lease, you don't own the equipment. 

Examples of equipment that many businesses lease include:

• Leasing Construction vehicles

• Leasing Agricultural equipment

• Leasing Computers, servers.

• Leasing HVAC systems, LED lighting, solar panels

• Energy needs for buildings

• Leasing Office equipment

Ownership: The lessor owns the equipment throughout the span of the lease. At the end of the lease lessee typically have the option to buy the equipment for the current FMV, you can return the equipment to the lessor/continue to lease the equipment.

So What are Finance Agreements ($1 Buyout)?

Equipment financing agreements (EFAs) are similar to loans, but they are not traditional loans like we described above. With the finance agreement, your amortization schedule stays the same regardless of when you pay each month and how much you pay. Your equipment finance agreement won’t have stated interest rates, and the balance won’t break down into principal and interest. Instead, your finance charges will get calculated into the series of fixed payments you make over the term of the finance agreement.