What Is Equipment Financing?

What Is Equipment Financing?

Equipment financing is a way to pay for business equipment over time instead of all at once. You get the equipment now, use it to make money, and pay it off with fixed monthly payments.

The equipment itself acts as collateral for the loan. This is a big deal. Because the lender can repossess the equipment if you stop paying, they take on less risk. Less risk for them means better terms for you - lower rates, longer repayment periods, and easier approval than unsecured loans like business term loans or lines of credit.

Equipment financing covers a wide range of purchases. Construction machinery, restaurant ovens, medical imaging systems, trucks, manufacturing tools, IT servers - if it has a clear business purpose, it can probably be financed.

Both new and used equipment qualify for financing. Used equipment may come with slightly shorter terms or higher rates, but it is absolutely eligible. Many businesses save money by financing quality used equipment at a fraction of the new price.

Equipment financing is one of the most accessible forms of business funding. Because the equipment secures the loan, lenders are more willing to work with newer businesses, lower credit scores, and lighter documentation than they would for unsecured products.

Equipment Loan vs Equipment Lease

The first decision you will face is whether to buy the equipment with a loan or lease it. Both options let you use equipment without paying the full price upfront, but they work differently and are better for different situations.

When to buy (loan): Choose an equipment loan if the equipment holds its value over time, you plan to use it for many years, or you want to take advantage of the Section 179 tax deduction. Construction equipment, manufacturing machinery, and trucks are common examples where buying makes more sense.

When to lease: Choose a lease if the equipment loses value quickly, if you need to upgrade every few years, or if you want the lowest possible monthly payment. Technology equipment, medical devices with frequent model updates, and aesthetic lasers are common lease candidates.

Types of Equipment Financing

There are several ways to finance equipment, and each one works differently. Here are the main options.

Equipment Finance Agreement (EFA)

This is the most common structure. You get the equipment, make fixed monthly payments, and own it free and clear when the payments end. It works like a car loan. The lender has a lien on the equipment until you pay it off.

$1 Buyout Lease

This works almost exactly like an EFA. You make monthly payments, and at the end of the lease you buy the equipment for $1. The difference is mostly in how it shows up on your books. Some businesses prefer this structure for accounting reasons.

Fair Market Value (FMV) Lease

With an FMV lease, your monthly payments are lower because you are not paying off the full value of the equipment. At the end of the lease, you can return the equipment, renew the lease, or buy it at whatever it is worth at that point. This is the best option when you plan to upgrade frequently.

SBA 504 Loan

The SBA 504 program can be used for major equipment purchases (typically $150,000 and up). It offers the longest terms (up to 10 years for equipment) and some of the lowest rates available. The trade-off is more paperwork, longer approval times, and stricter qualification requirements.

Business Line of Credit

For smaller equipment purchases, some businesses use a business line of credit. This works well for purchases under $25,000 where you want flexibility. You draw what you need and pay it back. The downside is higher rates than a dedicated equipment loan.

Qualification by Credit Tier

Your credit score is the biggest factor in determining what equipment financing programs are available to you and what they will cost. Here is how it breaks down by tier.

A few things to notice in this table. The rate difference between excellent and challenged credit is massive. A business owner with a 720 FICO might pay 8% on a $100,000 equipment loan. A business owner with a 560 FICO might pay 25% for the same equipment. Over a 3-year term, that is tens of thousands of dollars in extra cost.

If your credit score is below where you want it, there are two paths. You can finance now at a higher rate and refinance later when your score improves. Or you can spend a few months improving your credit first and then apply. The right answer depends on how urgently you need the equipment.

Costs: Rates, Terms, and Down Payments

Let us break down what equipment financing actually costs. There are three main cost components: the interest rate, the term length, and the down payment.

Interest Rates

Rates start as low as 7% for strong credit profiles and range up to 35% for challenged credit. The exact rate depends on your credit score, time in business, the equipment type, and the deal size.

Equipment financing rates are generally lower than unsecured business loan rates because the equipment serves as collateral. If you are comparing an equipment loan to a merchant cash advance or an unsecured term loan, the equipment loan will almost always be cheaper.

Term Lengths

Terms range from 12 to 72 months depending on the equipment type and your credit profile. Longer terms mean lower monthly payments but more total interest paid. Shorter terms cost less overall but require higher monthly payments.

Most equipment loans fall in the 24 to 60 month range. Some programs offer terms up to 72 months (6 years) for borrowers with strong credit profiles.

Down Payments

Many equipment financing programs require zero down. You can finance 100% of the equipment cost. Some conventional programs require 10% down on new equipment purchases. The requirement depends on the lender, your credit profile, and the deal structure.

Real Cost Example

Here is what a $100,000 equipment purchase looks like at different rates and terms:

Notice that the "challenged credit" scenario actually shows less total interest than the "fair credit" one. That is because the term is much shorter (24 vs 36 months). But look at the monthly payment: $5,384 vs $3,716. The shorter term costs less overall but squeezes cash flow much harder.

Section 179 Tax Benefits

Section 179 of the IRS tax code lets businesses deduct the full purchase price of qualifying equipment in the year they buy it. Instead of spreading the deduction over 5-7 years through depreciation, you take the entire write-off in year one.

For 2025, the Section 179 deduction limit is $1,250,000. That means you can deduct up to $1.25 million in equipment purchases in a single tax year. This is a major benefit for businesses that are buying equipment and want to reduce their tax bill immediately.

Worked Example: $150,000 Equipment Purchase

Let us say your business finances $150,000 worth of equipment this year. Here is how Section 179 changes the math:

That $37,500 in tax savings is real money. It reduces your effective cost of the equipment from $150,000 to $112,500. And here is the important part: you get this deduction whether you pay cash or finance the equipment. So you can finance the full amount, start using the equipment immediately, and still take the entire deduction in year one.

Section 179 applies to both new and used equipment, as long as it is "new to you" (meaning you have not already used it in your business before). It covers tangible business equipment, off-the-shelf software, and certain improvements to business property.

Equipment Types by Industry

Different industries need different equipment, and financing options vary based on the equipment type. Here is what commonly gets financed in the industries we work with most.

Construction

Excavators, backhoes, bulldozers, skid steers, cranes, concrete mixers, compactors, and generators. Construction equipment holds its value well, which makes it ideal for equipment loans rather than leases. Financing ranges from $10,000 for a small skid steer to $500,000 or more for heavy machinery.

Trucking and Transportation

Trucks, trailers, dump trucks, and specialized hauling equipment. This is one of the most active equipment financing categories. Established trucking companies with 5+ trucks and strong business credit can access conventional bank terms with some of the best rates available. Newer operators or single-truck owners have options too, just at higher rates.

Medical and Dental

X-ray machines, ultrasound equipment, MRI systems, dental chairs, operatory buildouts, sterilization equipment, and patient monitors. Medical equipment is expensive, but it generates revenue directly. Financing allows practices to add revenue-producing equipment without draining reserves.

Restaurant and Food Service

Commercial ovens, walk-in coolers and freezers, grills, fryers, prep tables, POS systems, exhaust hoods, and dishwashers. Restaurant equipment tends to have a shorter useful life than construction equipment, so terms are usually shorter. Some restaurant owners prefer leases for items like POS systems that need frequent updates.

Manufacturing

CNC machines, lathes, mills, injection molding equipment, packaging lines, welding equipment, plasma cutters, and industrial printers. Manufacturing equipment can range from $50,000 to several million dollars. Larger purchases may qualify for SBA 504 programs with the lowest rates and longest terms.

The Application Process

Getting equipment financing is simpler than most other business loans. Here is what the process looks like step by step.

Step 1: Identify the Equipment

Get a quote or invoice from the equipment vendor. The lender needs to know exactly what you are buying, how much it costs, and where you are getting it. New and used equipment both qualify.

Step 2: Submit Your Application

Most equipment financing applications are straightforward. You will need your basic business information, personal information for all owners, and the equipment quote. For smaller deals (under $100,000-$150,000), many programs are "app-only" - meaning no bank statements or tax returns required.

Step 3: Credit Review and Approval

The lender reviews your credit profile, business history, and the equipment details. Many lenders give decisions within 24 to 48 hours for app-only programs. Larger deals or those requiring full documentation take 1-2 weeks.

Step 4: Review Terms and Sign

You receive an offer with the rate, term, monthly payment, and any down payment requirement. Review it carefully. Ask questions. Compare it to other offers if you have them. Once you sign, the process moves to funding.

Step 5: Funding

The lender pays the equipment vendor directly. You take delivery of the equipment and start making monthly payments. Some programs fund in as little as 3-5 business days after signing.

Working with a broker can speed up this process significantly. Instead of applying to multiple lenders yourself, a broker submits your application to their lender network and brings back the best offers. This is especially valuable if your credit is not perfect, because different lenders have different credit requirements and a broker knows which programs fit your profile.

Frequently Asked Questions