Equipment financing can be used to acquire equipment necessary for your business operations. You can get a loan or a lease, depending on whether you want to utilize it for short- or long-term business purposes. The main difference between the two is that loans allow business owners to retain ownership of the equipment once the balance is fully paid, whereas leases can provide options for returning, upgrading, or purchasing the equipment at the end of the lease term.
Who Equipment Financing Is Right For
Depending on your business needs, equipment financing may be a financial solution that can allow you to keep up with operations and business growth. It may be a good fit if:
- You require equipment to help run your business: Equipment financing can help you acquire items needed to run your business. Some examples include computers, vehicles, machinery, and other specialized equipment.
- Your business is expanding: Additional equipment can help meet the growing needs of an expanding business. This can help increase production to continue growing revenue and sales.
- You want to finance the costs over a long period: Equipment financing helps you acquire new equipment at a lower upfront cost. If you don’t have enough funds to purchase equipment outright, it can help you spread the costs over several years.
- You have bad credit: Getting equipment financing with bad credit is easier because the loan is secured by the equipment you’re getting. This makes it less risky for lenders in the event of a default. Check out our recommendations for the best equipment financing companies for bad credit.
- The equipment you need will have a high return on investment (ROI): When financing equipment, you need to consider the purchase price and also the additional costs of financing. Ensure your expected return on investment (ROI) is high enough to cover these expenses.
- You need to upgrade your equipment regularly: If you’re in an industry that needs to upgrade equipment regularly to keep up with competitors, leasing can be a more cost-effective long-term solution as you’ll typically have options to upgrade, renew, or even purchase the equipment at the end of the term.
What Is an Equipment Loan?
An equipment loan involves getting financing from a lending institution. You can purchase an asset with the funds given, and once the loan is repaid in full, assume ownership of the asset and use it for however long you may need.
With an equipment loan, the asset acquired typically serves as the collateral to secure the loan, usually with a UCC filing. That said, paying off the balance in full may allow you to use the asset as collateral for other loans. This can help you improve your approval odds for subsequent financing needs and get you qualified for more competitive rates and terms.
Pros & Cons of an Equipment Loan
| PROS | CONS |
|---|---|
| Has simpler financing terms that allow you to become the owner once balance is paid off | Carries a more difficult path for upgrading equipment |
| Comes with lower long-term costs compared to leasing | Has down payment requirements that tend to be higher compared to leases |
| Offers easier qualification requirements compared to equipment leasing | Comes with monthly payments that tend to be higher than leases |
What Is Equipment Leasing?
Equipment leasing allows you to utilize an asset for a specified period, without assuming ownership at the end of the lease agreement. Essentially, instead of purchasing the asset, you’re renting it with the intention of returning it to the vendor upon lease expiration.
Depending on the lease terms, you can also purchase, renew, or upgrade the equipment once the initial lease term expires. There are different types of equipment leases, each with a different set of options and fee structures.
- $1 buyout lease: With this type of lease, you can purchase the equipment for $1 at the end of the lease term. Payments tend to be higher but can help spread the equipment cost into more manageable payments.
- 10% option lease: Once the initial lease expires, a 10% option allows you the flexibility to purchase the equipment for 10% of its value. The valuation is based on the initial purchase price.
- 10% purchase upon termination (PUT) lease: This is similar to a 10% option lease, but requires you to purchase the equipment at the end of the lease for the remaining value of 10%.
- Fair market value (FMV) lease: With an FMV lease, you can buy the equipment based on its current fair market value once the lease term expires. One of the potential downsides with this is the fact that the FMV value is unknown upfront.
- Terminal rental adjustment clause (TRAC) lease: A TRAC lease, often used for vehicles, gives business owners the option to select payment amounts based on what they want the final lump-sum payment to be.
Pros & Cons of an Equipment Lease
| PROS | CONS |
|---|---|
| Provides an easier path to regularly upgrade equipment | Has long-term costs that can exceed those associated with purchasing equipment |
| Can be less expensive than using an equipment loan for a purchase | Comes with terms that can be more difficult to understand compared to a loan |
| Requires a smaller down payment, allowing you to keep more cash on hand | Can be more difficult to qualify for compared to a loan |
Equipment Loans vs Leases: Rates, Terms & Qualifications
Rates, terms, and qualification requirements for an equipment loan or lease will vary depending on the lender or vendor you work with. However, you’ll find there are some common trends when it comes to the differences in getting equipment loans vs leases. We’ve summarized typical figures you’ll see among equipment financing companies.
| Typical Equipment Loan | Typical Equipment Lease | |
|---|---|---|
| Origination Fees | Up to 3% of the loan amount | 0% to 3% |
| Interest Rate | 7% to 20+% | 7% to 30% |
| Loan Amount | Up to $5 million | Up to $1 million |
| Loan Term | 1 to 10 years | Varies |
| Down Payment | 0% to 20% | 0% to 20% |
| Credit Score Requirement | 600 | 550+ |
| Time in Business Requirement | 0 to 12 months | 6 to 24 months |
| Annual Revenue Requirement | Varies | Varies |
| Funding Speed | 1 to 7 days | 1 to 4 days |
Check out our article on the best equipment financing companies to help you in your search for equipment financing. There, you can find a provider that meets your business needs and see if you meet the criteria necessary to qualify.
Equipment Loans vs Leases: When to Choose Each
Several reasons can influence which equipment financing option best suits your business needs. This can include the cash flow of your business from both a revenue and expense perspective and whether or not you need the equipment for a short- or long-term period.
Additionally, loans and leases have varying costs, including one-time down payment requirements and ongoing recurring payments. Your revenue can also be impacted by your choice of either a loan or a lease, as having outdated equipment can put you at a disadvantage to competitors.
When to Consider an Equipment Loan
- You don’t need to upgrade your equipment regularly: When an equipment loan is paid off, you’ll be able to retain full ownership of the equipment once it’s released by the lender. This can help you keep your long-term costs down, especially if the equipment has a long expected useful life.
- You want to retain full ownership of the equipment: Retaining ownership of equipment long-term can give you the flexibility to use it as you wish, as ownership carries fewer restrictions than leasing.
- You have enough funds for a down payment and can afford larger monthly payments: Purchasing equipment with a loan tends to be more expensive than a lease. Down payment requirements are generally higher, as are the monthly minimum payments.
When to Consider an Equipment Lease
- You only have a temporary need for the equipment: With many leases, you can return the equipment at the end of the term with no further financial obligations. Leasing can therefore be a good option if you’re unsure of the long-term use case for your business equipment.
- You don’t want ownership responsibilities: An equipment lease typically doesn’t require you to repair and maintain the asset. This is the owner’s responsibility and may be a better option for businesses that don’t want to manage the upkeep.
- You plan on upgrading the equipment frequently: Many leases have the option to easily upgrade equipment. This is especially helpful in industries where technology advances quickly.
- You want to have smaller monthly payments: Since you won’t always be able to retain ownership after the lease expires, leases tend to have lower monthly payments. This can help you acquire business equipment at a lower cost in the short term.
Alternatives to Equipment Financing
In the instance you don’t qualify for equipment financing or simply want to know all of your possible financing options, here are some alternatives to consider.
- Business line of credit: This is a revolving credit facility that can be used to make business purchases on an as-needed basis, with the balance repaid over time. Funds are flexible and can be requested via a draw, where the funds will be deposited into your account of choice. This is also a good option for short-term or emergency business expenses. To learn more, check out our guide on the best small business lines of credit.
- Business credit card: Similar to a business line of credit, this is also a revolving credit facility that allows you to make business purchases directly, on an as-needed basis up to the credit limit. The balance can be repaid as it accrues, and most can cover any business-related expense. Check out our roundup of the best business credit cards for startups to find one that works for you.
- Small Business Administration (SBA) loan: If you’re looking for a term loan that can finance more than just equipment, an SBA loan generally offers favorable rates and terms due to its government-backed nature. You can repay the loan in monthly installments, and get financing for a wide variety of business needs. Read our article on SBA loan types to find an applicable loan program.
- Home equity line of credit (HELOC): For businesses that may have trouble qualifying for a traditional business loan, a HELOC is a type of personal loan based on the value of your home. It’s another form of a revolving credit facility that allows you to make purchases, business-related or otherwise, and repay the balance over time. Our guide on how to use a HELOC for business can provide more information.
Check out our guide on how to get a small business loan to help you prepare a financing application, along with tips on how to better your chances of approval.
Frequently Asked Questions (FAQs)
Generally, equipment financing has flexible terms that typically range anywhere from one to 10 years. Depending on the loan type, lender, and your business needs, financing can be structured based on how you plan to utilize the asset, whether for short- or long-term usage. Loans are generally based on the expected useful life of the equipment being financed.
Yes, as equipment financing can be used to acquire both new and used assets. Whether you’re looking for a loan to purchase the equipment or a lease to rent it, equipment financing can help you obtain whatever assets you may need for your business operations.
Yes. Lenders or vendors will have varying qualification criteria for issuing financing—and startups can get a loan or lease if they meet those requirements. That said, having a strong credit score and financial history can help improve your odds of approval.
Bottom Line
Equipment financing can help you acquire equipment for your business operations and support your business’s growth. Depending on whether you need a loan or a lease, equipment financing is a solid option for both short- and long-term needs. Each allows you to spread the costs of the equipment over a longer period, allowing you to retain funds for emergency uses or other investments. Before pursuing this route, ensure you qualify and have explored all your available financing options.
