three people signing a contract
Equipment financing can prove invaluable when it comes to needing expensive tools or technology in a short amount of time. — Getty Images/Weekend Images Inc.

Every business uses some type of equipment in its daily operations — from basic tech devices like laptops and cell phones to more specialized machinery like tractors, manufacturing equipment or diagnostics machines.

As you might imagine, industrial equipment and machines can be expensive, and aspiring entrepreneurs rarely have that kind of budget when first starting out. Even established businesses may not have the funds to replace a delivery truck or x-ray machine when it breaks down. That's where business equipment financing comes in.

Why you should consider equipment financing

Whether you need to purchase computers for a growing team or invest in specialized machinery or vehicles, you'll need to consider how you will pay for that equipment.

A business equipment loan can help you quickly obtain working capital to buy or lease the items you need for your business. You’ll be able to manage your cash flow seamlessly, as this financing will allow you to spread out your payments over a longer period of time.

Who can get a business equipment loan?

The Equipment Leasing and Financing Association (ELFA) found that 78% of U.S. businesses across all industries rely on financing equipment purchases through loans, leases and lines of credit.

Below are a few common examples of business-related items that can be financed with an equipment loan:

  • Agricultural or farming equipment
  • Trucks and other business vehicles
  • Manufacturing machinery
  • Medical imaging equipment
  • Restaurant ovens and ranges
  • Construction equipment
  • IT equipment, servers and software

How do equipment loans work?

Equipment loans are specifically used for buying or leasing qualifying business equipment. In general, banks will lend anywhere from 80-100% of the financing for an equipment purchase, and the average loan term is three to seven years.

[For more on business loans, check out our guide on preparing to apply for a business loan.]

According to American Express, equipment financing lenders often offer flexible financing terms and do not always require down payments or excellent credit scores for loan approval. Much like auto financing, the purchased equipment typically serves as collateral for the loan. This means that if you fail to make your payments, the lender can claim ownership of that equipment.

However, assuming you successfully pay off the loan, the equipment is yours to keep at the end of the term.

It's important to note that the payment terms and interest rates of an equipment loan may vary greatly depending on several factors, including your personal and business credit scores, length of time in business, annual revenues and how much money you need to borrow.

78% of U.S. businesses across all industries rely on financing equipment purchases through loans, leases and lines of credit.

Equipment Leasing and Financing Association (ELFA)

Pros and cons of business equipment financing

There are a few good reasons to look into business equipment financing – and a few reasons it may not be the best choice.

Pros

  • Fast funding. You can quickly obtain the capital you need to make an important business equipment purchase, which may ultimately result in faster business and revenue growth.
  • Flexible terms. The requirements for an equipment-specific loan are often more flexible than conventional, all-purpose business loans.
  • Improved credit. Making on-time payments can have a positive impact on your business credit score.

Cons

  • Potential for added liabilities. If you have a lower credit score, a lender may require a blanket lien, which gives it the right to seize other business assets in the event of nonpayment; or for a personal guarantee, which holds you personally liable for loan payments if your business is unable to make them.
  • Length of term surpasses equipment life. You may find yourself still making loan payments beyond the extent of use of the equipment you purchased.
  • Default risk. As with any loan, you are taking on business debt and may wind up in financial trouble if you suddenly find yourself unable to make payments.

Equipment leasing vs. equipment financing

Instead of buying your equipment outright, you also have the option to lease it for a set period of time.

In this scenario, the lender owns the equipment and you are simply paying to use it. Unlike equipment financing, equipment leases do not require down payments or collateral, and may have lower monthly installments than an equipment loan.

Leasing is also a good option for you if you plan to buy the equipment but need more flexible payment terms, or if you think you will need to replace the equipment at the end of the lease.

There are two types of equipment leasing arrangements:

  • a capital lease, the more common type, in which you purchase the equipment and become the owner at the end of the lease term; and
  • an operating lease, typically used for technological equipment with high turnover or necessary updates, in which you return the borrowed equipment to the lender and lease or purchase new equipment.

However, depending on the purchase payment terms at the end, leasing could end up costing you more in the long run. Additionally, when you own a piece of equipment, you can take advantage of Section 179 depreciation tax benefits, and it will be yours to sell if you decide you no longer need or want it in the future.

Resources for business equipment financing

While some equipment dealers offer their own in-house financing, you will most likely need to seek out a separate lender to finance your equipment purchase. There are numerous commercial lenders that specialize in business equipment financing.

  • The Small Business Administration. If you have a good credit score and need a large amount of capital (up to $5.5 million), an SBA 7(a) or CDC/504 loan might be your best bet to finance an equipment purchase. For smaller equipment expenses, the SBA microloan program offers financing up to $50,000. Qualifying applicants will receive competitive interest rates and repayment time frames of up to six years. You can visit the SBA's Lender Match page to find the ideal SBA-approved lender for you.
  • Banks. Aside from SBA loans, you can apply for a conventional business loan directly through a bank, although the lengthy approval process and stringent financial requirements may not be ideal for some business owners.
  • Online lenders. If you're looking for faster funding with fewer qualifying criteria, an online alternative lender may be a better choice for you. Options for alternative business equipment loans include Balboa Capital, Crest Capital, eLease, Express Finance by Currency and StreetShares.

CO— does not review or recommend products or services. For more information on choosing the best business loan and financing options, visit our friends at business.com.

CO— aims to bring you inspiration from leading respected experts. However, before making any business decision, you should consult a professional who can advise you based on your individual situation.

Published April 03, 2019