If you’re in the market for financing a purchase for your small business and wondering what options you might have, it’s worth comparing the pros and cons of various loan types. For example, an equipment loan vs a business loan can offer you varying levels of flexibility with regard to loan terms and qualifications. To determine which type might be best for your business needs, I’ll break down the key differences and uses between the two.
Equipment financing vs business loans at a glance
| Equipment financing | Business loans | |
|---|---|---|
| Primary purpose | Specifically to purchase equipment (machinery, vehicles, tools, technology, etc.) | Can be used for almost any business expense |
| Best for | Businesses needing expensive equipment but wanting to preserve cash flow | Businesses needing broader funding for growth or operating expenses |
| Collateral requirement | The equipment itself typically serves as collateral | May require general business assets, a personal guarantee, or may be unsecured |
| Approval difficulty | Often easier to qualify because the equipment secures the loan | Depends on the lender and the loan type. Can be stricter, especially for large amounts |
| Down payment | Often 0% to 20%, depending on the lender and the credit | Usually no down payment, but may require strong credit or financials |
| Interest rates | Typically, lower because the loan is secured by equipment | Can range widely. Secured loans are lower, unsecured loans are higher |
| Loan terms | Usually 2 to 7 years, aligned with the equipment’s useful life | Can range from short-term, 3 to 18 months, to long-term, 10+ years |
| Funding speed | Often fast, sometimes within a few days | Varies widely depending on lender and loan type |
| Ownership | You own the equipment once the loan is paid off | No specific asset ownership tied to the loan |
| Risk to business | If you default, the lender can repossess the equipment | Default may impact multiple business assets or personal credit |
| Typical loan amounts | Often tied to equipment cost. Can range from a few thousand to $500,000+ | Varies widely from $5,000 short-term loans to $5 million+ SBA loans |
Equipment loans
Equipment financing helps businesses purchase machinery, vehicles, tools, technology, and other physical assets needed for daily operations. It allows you to spread the cost over time instead of paying the entire purchase price upfront. You borrow money for the equipment and repay the lender with interest over an agreed term.
Unlike general-purpose business loans, equipment financing is designated for a specific equipment purchase. The equipment typically serves as collateral, which lowers the lender’s risk and may help you qualify for funding. However, if you miss payments or default, you could risk losing the equipment through repossession, depending on your loan agreement.
With equipment financing, you apply through a bank, credit union, equipment dealer, or online lender. The lender reviews your credit score, time in business, annual revenue, cash flow, and details about the equipment itself.
If approved, the lender either provides funds for you to purchase the equipment or pays the vendor directly. Most loans require a down payment ranging from 0% to 20%, depending on your qualifications.
You’ll repay the loan in fixed monthly payments over a term that typically matches the equipment’s useful life, often two to 7 years, although it can be more. Once the loan is paid off, you may have the opportunity to own the equipment outright if the terms are outlined in your loan agreement.
- Equipment loan: A traditional loan used to purchase equipment. The equipment acts as collateral, and you own it once the loan is fully repaid.
- Equipment lease: Instead of buying, you rent the equipment for a fixed period. At the end of the lease, you may have the option to purchase it, renew the lease, or return it.
- Sale-leaseback: You sell equipment you already own to a lender or leasing company and then lease it back. This frees up cash while allowing you to continue using the equipment.
| PROS | CONS |
|---|---|
| Equipment serves as built-in collateral | Limited use, as funds can only be used for equipment |
| Ownership can be a possibility at the end of the loan term | Down payment may be required |
| Easier to qualify for compared to many unsecured business loans | Risk of repossession if you default |
Business loans
A business loan provides a lump sum of funding to cover a variety of business expenses. Unlike equipment financing, which is intended for a specific purchase, you can generally use the funds for items such as payroll, inventory, marketing, expansion, debt refinancing, or other working capital needs, subject to the lender’s terms.
Qualification requirements vary by lender and loan type. Some business loans require collateral, while others are unsecured but may still require a personal guarantee. If you default, the lender may pursue pledged assets or seek repayment through legal action, depending on your loan agreement.
QuickBooks Capital offers funding options that include term loans and lines of credit. Eligible QuickBooks users can apply directly through their accounts using business information already available in the platform. This can simplify the application process and help the lender evaluate your business for financing.
With a business loan, you can apply through a bank, credit union, SBA lender, or online lender. The lender reviews your credit score, time in business, annual revenue, cash flow, and existing debt obligations.
If approved, you receive a lump sum of funding deposited into your business bank account. In most cases, there is no required down payment, but approval standards may be stricter than those of asset-backed financing.
You repay the loan in fixed monthly installments over an agreed term. Repayment structures and timelines vary widely, ranging from short-term loans of six to 18 months to long-term loans lasting five to 10 years or more.
- Term loan: A traditional lump sum loan repaid over a fixed period with regular payments.
- SBA loan: A government-backed loan with competitive rates and longer repayment terms, often used for expansion or major investments.
- Business line of credit: A revolving credit line that allows you to borrow up to a set limit and pay interest only on what you use.
- Short-term loan: A loan with a shorter repayment period, typically under 2 years, often with faster approval.
| PROS | CONS |
|---|---|
| Equipment serves as built-in collateral | Limited use, as funds can only be used for equipment |
| Ownership can be a possibility at the end of the loan term | Down payment may be required |
| Easier to qualify for compared to many unsecured business loans | Risk of repossession if you default |
Where to get a business or equipment loan
Most business or equipment loans can be issued by a bank, credit union, broker, or online lender. However, if you’re looking for some options to help you get started, here are some of my top picks:
For a simple way to get a business term loan or line of credit, consider QuickBooks Capital:
QuickBooks Capital is Intuit’s small business funding option that integrates directly with QuickBooks accounting software. Because the application uses data from your QuickBooks account, the process is designed to be simpler and faster than many traditional loan applications. Businesses can apply for funding without leaving the platform they already use to manage finances, making it a convenient option for existing QuickBooks users. You can also manage your QuickBooks Term Loan through the same account, keeping loan information alongside your business finances.
- Products offered: QuickBooks Term Loan and QuickBooks Line of Credit
- Use of funds: Flexible, general business use (payroll, inventory, marketing, cash flow gaps)
- Loan amounts: Varies by loan type and qualifications
- Funding speed: Typically 1 to 2 business days after approval
- Repayment structure: Fixed payments for term loans, revolving access for line of credit (pay interest on what you use)
- Early payoff option: No prepayment penalties
- Qualification expectations: Approval is based in part on your QuickBooks account data, which can simplify qualification for existing users
For those interested in financing equipment, check out National Funding:
National Funding is an alternative lender that provides several types of small business financing, including equipment financing. This option is designed for businesses that need to purchase machinery, vehicles, tools, or other operational equipment but prefer to spread the cost over time instead of paying upfront.
- Products offered: Equipment financing (and other small business funding options)
- Use of funds: Primarily for purchasing equipment like machinery, vehicles, or tools
- Loan amounts: Often available up to around $150,000, depending on qualifications and equipment cost
- Funding speed: Can be as fast as about 24 hours after approval
- Repayment structure: Repayment terms vary, and some products may use factor-rate style pricing rather than traditional interest
- Early payoff option: May offer early payoff discounts depending on the agreement
- Qualification expectations: Varies
When to choose an equipment loan or a business loan
Choosing between an equipment loan and a general business loan starts with what you need to finance. An equipment loan may suit a specific purchase, while a business loan can cover a broader range of expenses. Your qualifications and ability to manage repayments also help determine which option fits your business.
You may find that using both makes sense. For example, an equipment loan could fund a large machinery purchase, while a business loan or line of credit helps cover payroll or marketing. Consider how each payment would affect your cash flow and whether taking on both loans would leave enough room for future expenses.
If you’re unsure which route makes sense, consider the following:
| Equipment financing | Business loan |
|---|---|
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Factors to consider when applying for an equipment or business loan
When deciding between an equipment loan and a general business loan, it’s important to evaluate how the funding will support your operations both now and long-term. While both provide access to capital, the structure, flexibility, and qualification requirements can differ significantly. Consider the following before making your decision:
Define your funding purpose
Start with how you plan to use the money. If you’re purchasing a specific piece of machinery, vehicle, or technology, an equipment loan is often a better fit. If you need funding for multiple expenses such as payroll, inventory, marketing, or expansion, a business loan provides broader flexibility.
Review your qualifications
Lenders evaluate your credit score, time in business, annual revenue, and cash flow for both options. However, equipment loans may be easier to qualify for because the equipment serves as collateral. Business loans, especially unsecured ones, may require stronger credit and financials.
Evaluate your cash flow and budget
Consider what monthly payment your business can realistically manage. Equipment loans are often structured around the useful life of the asset, which can make payments more predictable. Business loans vary widely in term length and repayment structure, so it’s important to ensure the payment schedule aligns with your cash flow.
Assess your risk tolerance
With an equipment loan, the lender can repossess the asset if you default. With a business loan, especially if it requires a personal guarantee, more of your business or personal assets could be at risk. Make sure you are comfortable with the level of exposure involved.
Consider long-term business goals
If your priority is acquiring essential equipment while preserving working capital, equipment financing may be the most strategic option. If your goal is broader growth, expansion, hiring, or improving overall liquidity, a business loan may better support those objectives.
Compare the loan terms carefully
Before signing any agreement, review interest rates, fees, repayment terms, collateral requirements, and prepayment penalties. Even small differences in structure can significantly affect the total cost of borrowing and your business’s financial flexibility.
Alternatives to consider
If an equipment loan or traditional business loan doesn’t feel like the right fit, there are other ways to fund your business needs. While loans are among the most common financing tools, they are not your only option. Consider the following alternatives:
- Business credit card: A business credit card can be a simple way to finance smaller equipment purchases or cover short-term expenses. Many cards offer rewards, cashback, or introductory 0% APR promotions that can reduce borrowing costs if you repay the balance within the promotional period. However, interest rates can be high if you carry a balance long term.
- Small business grants: Grants provide funding that does not need to be repaid. While competitive and often limited in scope, they can be a useful way to offset equipment costs or support growth without taking on debt.
- Crowdfunding: If your equipment purchase or business expansion has a compelling story, crowdfunding may allow you to raise funds from customers, supporters, or investors through online platforms.
Frequently asked questions (FAQs)
Can I use a business loan to buy equipment?
Yes. A business loan can be used to purchase equipment, along with other expenses. However, rates and qualification requirements may differ compared to a loan specifically designed for equipment purchases.
Which option is better for a new business?
It depends. If a new business needs a specific piece of equipment to operate, an equipment loan may be more accessible. If the business needs flexible working capital, qualifying for a traditional business loan may require stronger revenue and credit history.
Can I pay off either loan type early?
Some lenders allow early repayment without penalties, while others charge prepayment fees. Always review the loan agreement to understand the terms before signing.
Bottom line
Equipment loans and business loans both offer access to capital, but the right option depends on how you plan to use the funds. If you’re purchasing a specific piece of equipment and want predictable payments tied to that asset, an equipment loan is often the more straightforward and cost-effective choice. If you need flexible funding to cover multiple expenses like payroll, inventory, or expansion, a business loan may be the better fit. The best decision comes down to your funding purpose, cash flow, and long-term business goals.
