When businesses consider financing new equipment—whether it’s a truck, CNC machine, or kitchen appliances—price is just one piece of the puzzle. The often-overlooked factor? Depreciation.
Depreciation doesn’t just affect your balance sheet. It plays a big role in:
Loan terms
Resale value
Tax deductions
Financing structure
In this blog, we break down how depreciation works and how it should factor into your equipment financing strategy.
What Is Equipment Depreciation?
Depreciation is the gradual loss in value of an asset over time due to use, wear and tear, or obsolescence.
Example:
A $100,000 piece of manufacturing equipment may be worth only $60,000 after 3 years. That $40,000 drop in value is depreciation.
Why Depreciation Matters When Financing Equipment
1. It Affects Loan-to-Value (LTV) Ratios
Lenders don’t just care what the equipment costs—they care how much it will be worth in 1, 3, or 5 years. If the asset depreciates quickly, lenders may:
Offer shorter loan terms
Require higher down payments
Charge higher interest rates
2. It Influences Lease vs. Loan Decisions
If a machine loses value quickly, leasing might be better than owning. With leasing:
You don’t bear the full depreciation loss
You can upgrade sooner
Payments are typically lower than a full purchase loan
Fast vs. Slow Depreciating Equipment: Key Differences
| Asset Type | Depreciation Rate | Financing Tip |
|---|
| Laptops, tech gear | Fast (2–3 years) | Consider leasing instead of buying |
| Heavy machinery | Moderate (5–7 years) | Long-term loan may be worthwhile |
| Trucks/fleet vehicles | Fast-moderate (3–5 yrs) | Lease or short-term financing recommended |
| Medical/dental equipment | Moderate | Take advantage of Section 179 depreciation |
How to Use Depreciation to Your Advantage
One big benefit of depreciation? Tax savings.
Section 179 Deduction
Allows you to deduct the entire cost of qualifying equipment in the first year—even if you’re financing it.
Example:
Equipment cost: $100,000
Section 179 deduction: $100,000
Immediate tax savings based on your tax bracket
Bonus Depreciation
You can also claim 100% bonus depreciation in some years for new and used equipment. This reduces your taxable income significantly.
When to Finance, Lease, or Pay Cash
| Scenario | Best Option | Why |
|---|
| Fast-depreciating tech | Lease | Avoid value loss, upgrade quickly |
| Essential machinery, long use life | Loan/Finance | Own long-term asset, claim depreciation |
| Minor tools or low-cost assets | Cash | No interest, no depreciation complexity |
Depreciation isn’t just an accounting detail—it directly impacts your financing terms, tax position, and equipment strategy.
Smart businesses look at the full picture:
How long will this equipment be useful?
What’s the total cost after depreciation?
Should I own it—or just use it?
By understanding how depreciation works, you’ll be better prepared to negotiate terms, claim tax benefits, and make financing choices that save your business money in the long run.
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