Equipment Financing

What Is Equipment Financing?

Equipment financing is a business loan that provides capital for purchasing new or used equipment, such as vehicles, machinery or technology. Equipment loans may fund up to 100% of the value of the equipment you want to purchase. These loans are repaid over time with interest.

Business equipment financing is asset-based financing, which means the equipment itself is collateral for the loan. For this reason, equipment financing is often easier to qualify for than other types of small business loans. Equipment loans can be great options for startups or businesses with average or poor credit scores.

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How Does Equipment Financing Work?

Equipment financing is similar to a business term loan. You receive funding for new or used business equipment and make fixed payments over time. You can usually borrow up to 100% of the equipment value, but that varies with equipment type, equipment condition, the lender and your qualifications.

Business equipment financing is a type of asset-based financing—meaning the equipment itself is used to back, or secure, the loan. Generally, this means you won’t have to put up additional collateral and you may be able to avoid signing a personal guarantee.

You may, however, have to provide a down payment of 10% to 25% of the equipment you’re financing. The larger the down payment , the lower the interest rate you’re likely to receive. Overall, equipment financing rates typically range from 4% to 40%, based on the lender, your business’s qualifications, and the equipment you’re purchasing.

Repayment terms on equipment financing are usually five to six years, although some lenders may offer longer terms, up to 10 years. Additionally, some lenders may base your repayment terms on the anticipated life of the equipment—that way, if you default on the loan and they have to seize the equipment and liquidate it, they’ll still be able to recover their losses.

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Equipment Financing vs. Equipment Leasing

Lenders may also offer equipment leasing. Although there are some nuanced differences between equipment financing and equipment leasing.

• With an equipment loan you own the equipment at the end of your repayment period.
• With equipment leasing, you have the option to purchase the equipment at the end of the term or enter into a new lease for the equipment you need—similar to leasing a car.

Generally, equipment leasing is more expensive than equipment financing in the long run. Refer to our equipment leasing vs. financing guide to learn more about the differences between these options.

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Equipment Financing Example

Now that we have a basic sense of how equipment financing works, let’s walk through an example.

Let’s say you need to purchase a commercial oven for your restaurant—the oven costs $10,000.

You find a lender that’s willing to offer you an equipment loan for the full price of the equipment ($10,000). The lender will charge a 12% interest rate over a three-year term with monthly repayments.

With this setup, you’ll pay back the capital you’ve borrowed during the three-year term with monthly payments of $332.14 (assuming there are no other loan fees). Overall, this means you’ll be paying $11,957.15 for a $10,000 piece of equipment and the actual cost of your equipment loan is $1,957.15.

Although this may seem like a sizable amount to pay based on the value of the equipment, the benefit of business equipment financing (like most debt financing) is that you can pay for this large purchase over three years and don’t have to take the time to save $10,000 to purchase the oven you need right now.

This being said, it’s always important to understand the true cost of your financing before agreeing to an equipment (or any other type) of loan.