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How equipment financing works and where to get it

If you don’t have the cash to buy pricey equipment, financing or leasing could be an option.

Equipment loans help your business cover the cost of expensive machinery when you want to boost production or update your current operating systems. You can often finance business equipment directly through the manufacturer or seller — but you might find a better deal through a bank or alternative lender.

How business equipment financing works

Equipment financing is a type of business loan specifically for purchasing equipment. It’s very similar to how to finance a car or home — the asset secures the loan, the loan amount is based on the asset’s value, and you typically repay the loan in monthly installments.

Most lenders allow you to finance around 80% to 100% of the equipment’s value. The loan term is based on how long the equipment functions, usually starting at five years. Once you’ve repaid the loan in full, you own the equipment.

This type of financing is especially useful for those starting a new business or newer businesses that don’t quite have the revenue to buy complex machinery outright. Equipment financing can help in purchasing restaurant ovens, tractors, commercial refrigerators, construction equipment, office furniture, company vehicles and so on.

Equipment loans vs. equipment leasing

Equipment loans are great if you have a long-term need for equipment that doesn’t become outdated after five or 10 years. But leasing may be better suited for businesses that need equipment for a short-term project, need to replace equipment every few years, or if your business’s equipment becomes outdated quickly (like technology or machinery).

Equipment leasing often comes with lower monthly payments than equipment loans, and there’s usually no down payment requirement. At the end of the lease, you usually have the option to return the asset or buy it outright for the remainder of the equipment’s value.

Equipment financing rates and terms

Equipment financing is one of the least expensive types of business financing because it’s secured by the asset you’re buying.

Business loan marketplaces like Fundera and Lendio offer equipment financing at rates ranging anywhere from 4% to 40% APR. And that often includes an origination fee of 1.5% to 9%. You may also have to plan for a down payment of about 10% of the equipment’s manufacturing price, depending on the lender. You can calculate the estimated cost of your business loan using our business loan calculator.

The monthly and total cost of equipment financing also depends on your loan term. The loan terms could be anywhere from one to 25 years, which is determined by the longevity of the equipment you’re buying. But if your loan allows prepayment without penalty, you can repay your loan early and save money on interest.

Equipment financing calculator

Use this calculator to estimate the cost of financing equipment for your business.

Equipment financing calculator

See how much an equipment loan might cost you each month and overall.
Your loan
Loan amount
$
Loan terms (in years)
Interest rate
%

Fill out the form and click on “Calculate” to see your estimated monthly payment.

or

Compare more lenders
You can expect to pay back $ per month
Based on your loan terms
Principal $
Interest $
Total Cost $

Equipment purchases can be tax-deductible

US companies can deduct equipment purchases up to the limit of $1,220,000, as stated in Section 179. You may be able to deduct the full amount of the equipment — even if you haven’t paid off your loan. This deduction can also apply to equipment leasing.

Speak with a tax professional to see if your business and purchased equipment qualifies for the deduction.

How to qualify for equipment financing

Typical requirements for business equipment loans include:

  • Good credit score of at least 670
  • Annual revenue of at least $50,000
  • At least 12 months in business
  • Down payment, 10% of loan amount

Some good news for you: Equipment financing has very high approval rates compared to other business loans. In 2023, 87% of applicants were at least partially approved, according to the latest Small Business Credit Survey.

How quickly can you get funding?

Many lenders advertise a turnaround time of one to two business days. Oftentimes, equipment financing can be approved or denied within the same day you apply.

Pros and cons of equipment financing

Equipment loans have great perks, but there are disadvantages compared to equipment leasing.

Pros

  • Self-collateralized loan. Equipment financing typically doesn’t require an appraisal, and the loan amount is determined by the asset’s value — so it’s a simple process.
  • High approval rate. Equipment loans have a high approval rate around 87%.
  • Lower APRs. Secured loans tend to come with lower rates compared to the average rate for business loans, and equipment financing may come with APRs as low as 5%.
  • Grow your business. Instead of waiting to have enough cash to buy equipment outright, financing can help you more quickly increase your business’s productivity and boost your profits.
  • Build credit. Taking on an equipment loan can help you improve your business credit.

Cons

  • Down payment. Equipment financing often comes with a down payment requirement, typically up to 10%.
  • Leasing may be better. For equipment with quick depreciation, leasing could make more sense — especially if you need to replace it frequently.
  • Negative equity risk. There is a possibility that the equipment you finance depreciates faster than anticipated, putting you in a negative equity position.

Equipment financing collateral requirements

When you take out an equipment loan, the lender often puts a lien on the equipment you purchase and may require a personal guarantee from business owners with a 20% stake in the company or more.

If your business defaults on the loan and the equipment can’t sell at a price that repays your loan balance, you’re personally responsible for paying off the remaining balance.

Where to get equipment financing

You’ve got a wide range of lending options to check out before you finance any equipment.

Specialized equipment financing companies

Some companies focus on providing equipment finances to specific industries. Some of the best specialized equipment financing companies offer low rates and fees as well as a quick online application and approval process. Plus, these lenders are experts in the equipment needs of the type of industry they support.

Manufacturer or dealer financing

Some manufacturers or dealers will have equipment financing or leasing options available, often through third-party lenders. Rates may be very favorable, and dealers often advertise promotional rates sometimes as low as 2%.

But the most notable downside with manufacturer financing is that rates, amounts and terms will vary greatly, and you may have to contact the manufacturer or dealer directly to get hard details. Great credit is often required, and down payment requirements are common.

Banks and credit unions

A more traditional lending option, banks and credit unions are known for competitive rates in business financing. And if you have good credit and a relationship with the institution, it’s more likely that the lender will have more flexible requirements than online lenders or direct financing.

SBA lenders

The Small Business Administration (SBA) loan program offers government-backed business loans. Many of these loan programs offer equipment financing, including SBA 7(a), 504 loans, express loans and even microloans.

The SBA sets limits on interest rates, loan amounts and terms. And if you can’t repay the loan, the government will repay up to 85% of the loan amount, so they’re a very popular choice for business financing. However, SBA loans are known to be a hassle, often taking weeks or months to apply and get funded.

Online lenders

Online lenders can include direct lenders, financial technology (fintech) companies, peer-to-peer lending platforms and lending marketplaces. These lenders are known for convenience, since most of the lending process is done entirely online: from applying and submitting documents to underwriting and funding.

If you want a hassle-free loan process, these lenders are worth looking into. However, they may not have the lowest rates, especially compared to dealerships or banks.

Equipment financing by industry

Equipment loans are often used for expensive, heavy machinery, but many industries also rely on equipment financing, such as:

How to apply for equipment loans

If you need equipment to run your business such as machinery, technology or company vehicles, you can start the process of getting an equipment loan with these steps:

  1. Gather your documentation. Lenders want to review paperwork like business licenses, bank statements, tax returns and other financial information about your business.
  2. Determine how much you’ll need. It’s important to shop around for different equipment options. This will give you an idea of how much funding you’ll need and it can help you find the best deals.
  3. Check your eligibility. While qualifications vary by lender, general requirements include a good business credit score, generally over 560, at least a year or two years in business and at least $50,000 in annual revenue.
  4. Compare lenders. Once you know what equipment you need and how much capital you need, compare multiple lenders. Check out traditional lenders such as banks and credit unions, online lenders and companies that specialize in providing business equipment loans to find the best deal.

Equipment financing for bad credit and startups

For some lenders offering equipment loans, enough positive factors in your financial portfolio may make up for a low credit score, or less than a year in business. So, if you’re in the process of starting a business and you plan on needing to fund equipment purchases, this type of loan isn’t out of the question.

Since the loan is secured, credit score requirements are often more flexible, and lenders may be more willing to focus on cash flow and overall revenue. Online lenders or lenders specializing in startup financing may be good places to start — but watch out for high rates and carefully compare providers.

Looking for more guidance?

Learn more about business financing and the best business loan options with our comprehensive business loan guide.

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