Equipment financing vs leasing: loans, $1 buyout and FMV leases

3 ways to get the equipment

All 3 spread the cost of a machine over the years you use it, which is why equipment financing usually fits long-lived equipment better than a short-term advance. They differ in who owns the equipment, what the payment is, how taxes treat it and what happens when the term ends.

Published terms give a sense of the market. South End Capital advertises equipment financing from $30,000 to $5 million with rates from 8.5%, terms of up to 84 months and 0% down on purchases. Big Think Capital lists terms matched to the equipment's life, down payments often at 0% and both $1 buyout and fair market value lease options.

How an equipment loan works

You pick the machine, the lender pays the vendor, and you repay in fixed monthly payments. The lender takes a security interest in the equipment, usually recorded with a UCC-1 filing, and releases it when you finish. Because the machine itself is the collateral, its value carries part of the credit decision. Big Think Capital, for example, lists a 580 minimum credit score for equipment financing.

Match the term to the machine. A 7-year loan on an excavator that works for 15 years is sensible. A 7-year loan on laptops you will replace in 3 years leaves you paying for equipment you no longer use.

$1 buyout leases

The law looks through the label. Under the Uniform Commercial Code, a lease you cannot terminate that gives you the option to become the owner for no or nominal additional consideration creates a security interest, not a true lease. In plain terms, a $1 buyout lease is financing with the lessor as the lender.

The IRS takes a similar view for taxes. It lists signs that a lease is really a conditional sales contract, including an option to buy the property at a nominal price compared with its value, or title passing after a stated amount of payments. If your agreement is a conditional sale, you generally recover the cost through depreciation instead of deducting the payments as rent.

Fair market value leases

Because the lessor expects the equipment to be worth something at the end, it does not charge you for the whole cost, so the payment is lower. The UCC treats a purchase option stated at fair market value as not nominal, which is part of what keeps a fair market value lease a true lease.

If the agreement is a true lease for tax purposes, the IRS says you may deduct the payments as rent. The trade-off is that you never build ownership unless you pay the market price at the end, and nobody can tell you today what that price will be.

Worked example: a $60,000 machine

2 lessons stand out. First, at the same rate, a $1 buyout lease costs the same as a zero-down loan; the loan above is cheaper in total only because the $6,000 down payment is money you did not borrow. Second, the FMV lease saves $196.01 a month against the $1 buyout, but if you end up buying the machine, it costs $2,590.71 more in total.

Section 179 and depreciation

• The 2026 limit. IRS Revenue Procedure 2025-32 sets the Section 179 limit for tax years beginning in 2026 at $2,560,000, reduced dollar for dollar once the cost of qualifying property placed in service tops $4,090,000. Sport utility vehicles are capped at $32,000.
• Business use. IRS Publication 946 says you can elect Section 179 only if you use the property more than 50% for business in the year you place it in service.
• Financing is fine. Publication 946 also makes clear that property you buy with debt counts as acquired by purchase; you own it even if it is subject to a debt.
• Bonus depreciation. A 100% special depreciation allowance applies to certain qualified property acquired and placed in service after January 19, 2025.

An FMV lease that qualifies as a true lease works differently: you deduct the lease payments as rent, and the lessor, not you, depreciates the equipment. Tax rules turn on your facts, so confirm the treatment with your tax preparer before you choose a structure for tax reasons.

What happens at lease end

• $1 buyout: pay the $1, get the title or bill of sale, and confirm the lessor releases its UCC filing.
• FMV lease: ask who sets the fair market value and how, whether you must give notice to return, renew or buy, and by what date.
• Return conditions: ask what condition the equipment must be in, who pays for shipping or de-installation, and what charges apply for excess wear.
• Renewal: ask whether the lease renews automatically if you miss the notice window, and at what payment.

Questions for any lender or lessor

• What is the rate or implied rate, and what is the APR once fees are included?
• Are there documentation, origination or filing fees, and are they financed or paid upfront?
• Are any payments due in advance, such as the first and last month?
• Can you pay off early, and is the payoff the remaining principal or the sum of the remaining payments?
• Who insures and maintains the equipment during the term?
• For a lease, is it written as a $1 buyout, a fair market value purchase option or a fixed purchase price?

Which one fits your business

• Loan or $1 buyout: an excavator for a construction company, a walk-in cooler, a commercial oven: equipment that will work long after the payments end.
• FMV lease: technology or imaging equipment likely to be outdated in 3 to 5 years, or equipment you need for a single contract.
• Neither, yet: if you cannot qualify today, avoid funding a long-lived machine with a short advance whose daily payments assume the machine pays for itself in months.

An SBA 7(a) or 504 loan can also finance equipment on longer terms; our guide to SBA loans covers the limits. Compare the payment on any option with our loan calculator.