Equipment financing is used by business owners to enable them to acquire equipment—like machinery or vehicles—for their business. Small business equipment financing may be in the form of a loan or a lease. This type of funding allows businesses access to expensive hard assets they would not otherwise be able to afford.
What Equipment Financing Is
Equipment financing is a form of an asset-based loan, in which the equipment that is being purchased—or leased—is used as collateral to secure the loan. Equipment loans and leases allow small businesses to purchase expensive equipment without the need to pay for the machinery in full upfront.
How Small Business Equipment Financing Works
Equipment financing is a means of borrowing funds—either through an equipment loan or lease—to enable a business to purchase or borrow an equipment asset. In many ways, this type of financing is similar to an auto loan to purchase a new car.
Like with an auto loan, the equipment being financed is used as collateral to back the loan. In the event your business is unable to make the required payments, the lender can repossess the equipment in lieu of the remaining amount due on the loan or lease.
Equipment loans amortize the loan amount over the repayment period, meaning that when you pay your final payment you are the sole owner of the equipment. Leasing equipment results in lower monthly payments, as you are effectively renting the equipment with the option to buy the equipment for the remaining value at the end of the lease.
There are a number of different lease options available for equipment, and it is crucial that you fully understand your lease agreement before finalizing the deal. Some lease agreements allow you to purchase the equipment at the end of the lease with a large balloon payment. Leases may also be structured to have a small payment at the end of the lease, while others call for low monthly payments but require you to pay fair market value for the equipment at the end of the lease.
Who Equipment Financing is Right For
Nearly all businesses require equipment assets in order to operate; however, many can finance the cost without seeking a loan geared specifically toward equipment purchases. So, who needs this type of financing?
Some businesses that may benefit from equipment financing include:
- Startup businesses purchasing equipment: Small business owners that need specialized equipment to operate their new business often use equipment financing to fund the purchase.
- Businesses that are expanding: A business that is expanding its operations may use small business equipment financing to purchase additional equipment.
- Established businesses with outdated equipment: As newer technologies emerge, a business owner may find the equipment they’re using makes them less competitive than those using newer equipment. As such, equipment financing can help them procure more efficient equipment.
In general, any small business that needs specialized or expensive equipment to operate may want to consider an equipment loan or lease as a means of affordable financing. Because equipment financing is secured by collateral—the equipment being purchased—interest rates are generally much lower than one would be offered on an unsecured loan.
Equipment Loans vs Equipment Leasing
The two primary forms of equipment financing are equipment loans and equipment leases. While both financing options have similar interest rates and repayment terms, they are two very different methods of funding equipment for your business.
With an equipment loan, you own the piece of equipment at the end of the repayment period; having paid for the asset in full. Equipment leasing offers you the convenience of a reduced total payment, and the opportunity to pay a balloon payment at the end of the lease should you decide that you want to keep the equipment.
Equipment Loans Costs, Terms & Qualifications
As with most forms of asset-based financing, the rates and terms for equipment financing are more favorable than you will be offered with an unsecured loan. Because the loan is collateralized by the equipment, there’s less risk to the lender in the event that you default on the loan. This lowered risk results in lower interest rates for you as the borrower.
Equipment Loan Costs
6% to 30%
Up to 3% of the loan amount
5% to 20%
Equipment Loan Terms
|Loan Amounts||$10,000 to $500,000|
|Repayment Terms||2 to 7 years|
Equipment Loan Qualifications
|Minimum Credit Score||600|
|Collateral||Financed equipment and blanket UCC lien|
|Time in Business||At least 6 months|
|Annual Revenue||At least $25,000|
Equipment Leasing Costs, Terms & Qualifications
In general, the overall costs and terms associated with equipment leasing are similar to those you would experience with an equipment loan. However, the qualification requirements are typically more lenient for leasing than they are for direct financing, which can make it easier for a small business to qualify.
If you are considering an equipment lease to finance your equipment needs, you may want to utilize an equipment lease calculator to determine what your payments will look like in various scenarios. This can help you determine which lease type may be the most cost-effective for your business. Our equipment lease calculator provides you with the estimated monthly payment amount, the amount needed to purchase the equipment at the end of the lease, and the value of the equipment asset at the end of the lease.
Equipment Lease Costs
6% to 30%
0% to 20%
Equipment Lease Terms
Up to $1 million
2 to 5 years
Equipment Lease Qualifications
Minimum Credit Score
Financed equipment and blanket UCC lien
Time in Business
At least 2 years
No minimum requirement
What to Consider When Selecting Equipment Financing
Business owners deciding whether or not they should purchase or lease equipment should consider the down payment, monthly payments, equipment use, and the life of the equipment. Each of these will help you decide which option is the best fit and the most affordable for your business.
The down payment to purchase equipment can be as low as 5% of the equipment cost—when financing with an equipment loan—but is often higher. Small business owners struggling to afford a down payment may prefer getting a leasing option, as some equipment lease providers do not require a down payment. Besides affordability, some business owners may find that the money put down for equipment can be invested for a higher return in a different part of their business.
Leasing and financing equipment both have several options to control monthly payments. In general, monthly payments for an equipment loan will be higher than they will be for leasing. Leasing also offers multiple structures that can reduce upfront payments and create positive cash flow sooner for newer businesses.
Purchasing equipment that’s needed for a single job or project offers little future value to your business; in cases like this, leasing the equipment would likely be a more reasonable option. On the other hand, small businesses that plan on using equipment repeatedly are better off purchasing the equipment to use on multiple projects.
The life of the equipment, or how long it can be depreciated for, can result in significant tax savings for business owners that purchase the equipment. Equipment that doesn’t last long is usually better to lease since you can receive a new piece of equipment shortly after. Equipment—like a dump truck—with a long useful life is better to purchase because it lasts and does not need to be replaced frequently.
Finding Small Business Equipment Financing Providers
Selecting the best equipment financing company depends on the type of equipment and the financing structure. Most manufacturers offer financing and leasing options and they typically offer the lowest overall costs. There are also multiple online and remote equipment financing and equipment leasing companies that can work with new and used equipment across multiple industries.
Pros & Cons of Equipment Financing
Equipment financing allows small business owners to access equipment with affordable monthly payments and potential tax benefits. However, financing equipment costs more than an outright purchase, some providers have complex contracts, and down payment costs can be unaffordable.
Pros of Equipment Financing
- Access to expensive equipment: Small business equipment financing allows business owners to acquire equipment they otherwise would be unable to afford.
- Affordable monthly payments: Equipment purchases are expensive and can be difficult to afford upfront. Financing allows you to make affordable monthly payments and not deplete your cash reserves.
- Tax benefits: When purchasing equipment there are tax advantages, including deductions for purchase, depreciation, and interest expenses for your business.
Cons of Equipment Financing
- Higher cost than outright purchase: Because you are paying interest and fees on the loan or lease, the final cost of the equipment will be higher than if you were able to purchase the equipment up front.
- Complex contracts: Equipment financing contracts—especially lease contracts—can be highly complicated to read and understand.
- It may be difficult to afford a down payment: While there are some lease options that do not require a down payment, most forms of equipment financing will require you to provide some percentage of the purchase price upfront.
Equipment financing is designed specifically to assist business owners with the acquisition of hard assets for their business. Small business equipment financing can be a more affordable way of procuring the equipment your business needs without having to purchase it out of your cash reserves.