Equipment Financing for Small Businesses
Equipment financing lets a business acquire essential tools, vehicles, and technology now — and spread the cost over time. This guide explains how it works, what lenders look for, and how to decide between financing and leasing without the sales fluff.
What counts as “equipment”?
Think revenue-producing or mission-critical items with a useful life of 3–15 years:
- Vehicles & trailers (box trucks, service vans, semis)
- Construction, manufacturing, & agricultural machinery
- Medical, dental, & veterinary devices
- Restaurant & kitchen equipment
- IT hardware, POS systems, and specialized software licenses
Quick Snapshot
- Terms typically 24–84 months (matching useful life)
- Rates vary by credit, asset type, and age (new vs. used)
- Asset secures the financing (may reduce down payment)
- Payments may be tax-deductible (consult your tax professional)
How Equipment Financing Works
In a standard equipment loan, a lender advances funds to purchase the asset. The equipment itself is the primary collateral. You repay through fixed monthly payments that include principal and interest. At payoff, you own the equipment free and clear.
In an equipment lease, you make scheduled payments to use the asset. You may return, renew, or purchase at the end of the term depending on the lease type (FMV, $1 buyout, or 10% purchase option).
Financing vs. Leasing: Which Fits Best?
| Consideration | Finance (Loan) | Lease |
|---|---|---|
| Ownership | You own the asset after payoff. | You use it for the term; options to return, renew, or buy. |
| Upfront Cost | Often 0–20% down depending on profile and asset. | Lower upfront cost; sometimes 1–2 payments due at signing. |
| Monthly Payment | Generally lower APR; fixed amortization. | Often lower monthly cost; may include residual. |
| Accounting | Loan + asset depreciation (tax treatment varies). | Operating or capital lease treatment (consult your CPA). |
| When It Shines | Long useful life, want to build equity, predictable usage. | Rapidly evolving tech, short projects, preservation of cash. |
Typical Terms & Structures
- Term length: 2–7 years is common; heavy equipment may run longer.
- Payment structure: Monthly fixed payments; seasonal or deferred starts are sometimes available.
- Collateral: The equipment is the primary collateral; additional guarantees may apply.
- Down payment: 0–20% depending on credit, time in business, and asset type.
How Lenders Evaluate Applications
Underwriting focuses on the ability to repay and the asset’s resale strength. Expect review of:
- Time in business: Under 2 years may require stronger credit, more down, or cosign.
- Credit profile: Business credit and (often) personal credit for closely-held companies.
- Cash flow: Can the business support the new payment alongside existing obligations?
- Bank statements & tax returns: Stability of deposits/revenue trends.
- Equipment details: New vs. used, age, hours/miles, vendor invoice, serial/VIN.
Documents to Prepare
For most applications
- Equipment quote or purchase agreement
- Driver’s license (and entity docs)
- Last 3–6 months of business bank statements
- Voided business check / routing info
For larger amounts
- 2 years business tax returns & YTD financials
- Debt schedule (existing loans/leases)
- Proof of insurance or binder
- Appraisal (occasionally, for specialty used assets)
New vs. Used Equipment
New gear generally qualifies for the longest terms and best rates. Used equipment can be a smart value play, but lenders weigh hours, miles, and resale demand. For older assets, expect shorter terms, higher rates, or a larger down payment.
Tax Considerations (Talk to Your CPA)
Businesses often deduct interest or lease payments and may use Section 179 or bonus depreciation for qualifying purchases. Tax treatment varies — always consult a qualified tax professional for your situation.
Pros & Cons at a Glance
Benefits
- Preserves cash on hand for payroll, marketing, or inventory
- Predictable fixed payments simplify budgeting
- Asset itself secures the obligation (less extra collateral)
- Potential tax advantages (ask your CPA)
Trade-offs
- Total cost can exceed paying cash
- Older used equipment may carry shorter terms
- Insurance and maintenance remain your responsibility
Choosing the Right Path
Ask these questions before you sign:
- Will the new equipment increase revenue or reduce costs enough to cover the payment comfortably?
- How long do you plan to keep the asset? (Match term to useful life.)
- Is staying current with the newest technology critical? (Leasing may help.)
- What happens at term end — do you want ownership, or flexibility to upgrade?
Frequently Asked Questions
What credit score is needed?
Programs exist across credit tiers. Strong profiles get the best terms; younger businesses or lower credit may see higher rates or require a larger down payment.
Can startups qualify?
Yes — especially with good personal credit, industry experience, or a down payment. Vendor quotes and a simple business plan help underwriters.
Are payments fixed?
Most equipment loans offer fixed monthly payments for budgeting clarity. Seasonal payment structures may be available in agriculture and construction.
What if the equipment breaks?
Repairs and maintenance are typically your responsibility. Consider warranties and realistic reserves for upkeep.
Is leasing always cheaper?
Not always. Leasing may lower upfront and monthly costs but can have a residual. Loans may build equity and produce lower lifetime cost if you keep the asset long term.