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Equipment is a big expense for any business, and figuring out how to pay for it can be challenging.

But tackling this is important if you want to expand and boost efficiency.

And there’s not one right answer for everyone. It all depends on your unique circumstances. 

• How’s your cash flow?
• How long are you actually going to use this equipment? 
• How much risk are you comfortable taking on?

We’ll discuss the most common ways to secure the equipment you need without completely blowing your budget.

Here are the most common types of equipment financing:

1. Equipment loans

An equipment loan allows businesses to borrow money specifically to purchase equipment, with the equipment itself acting as collateral. 

If you default on the loan, the lender repossess the equipment.

The advantage of an equipment loan is that once you’ve fully repaid the loan, you own the equipment outright.

Key features include:

• Ownership: With an equipment loan, your business owns the equipment outright after you’ve made all the loan payments. This differs from leasing, where you don’t own the equipment and might have to return or upgrade it at the end of the lease term.
• Repayment terms: Loan terms range from 12 months to 10 years, depending on the equipment’s expected lifespan. Shorter terms mean higher monthly payments but lower overall interest, while longer terms reduce monthly payments but increase the total interest paid over time.
• Interest rates: Interest rates for equipment loans range between 6% and 30%, depending on factors like your credit score, time in business, and the loan provider. For qualifying businesses, lenders such as Bank of America offer some of the lowest interest rates, starting around 6.75%. Rates can be even lower for businesses with established credit and strong financials. The interest rates will generally be higher for startups or businesses with lower credit scores.
• Down payments: While some lenders may offer 100% financing for equipment, they commonly require a down payment, ranging from 10% to 20% of the equipment’s cost. A larger down payment sometimes helps you secure better loan terms, such as lower interest rates.
• Tax benefits: One advantage of equipment loans is the ability to depreciate the equipment over time, which provides tax benefits. You may also deduct interest payments on your taxes, making this a cost-effective financing option in the long run.

Pros and cons of equipment loans

Pros

• Full ownership: Once you’ve repaid the loan, the equipment is yours, which adds value to your business over time.
• Collateral-based: Since the equipment is collateral, you don’t need to put up other business assets, reducing your personal risk.
• Tax deductions: Depreciation and interest deductions can provide tax savings.
• Fixed payments: Equipment loans often come with fixed monthly payments, making it easier to budget for future expenses.

Cons

• Risk of obsolescence: If the equipment becomes outdated before repaying the loan, you’re stuck with it. This is problematic with rapidly evolving technology.
• Down payments: Some loans require a significant down payment, which could strain your business’s cash flow.
• Higher interest rates for new businesses: Startups and businesses with lower credit scores might face higher interest rates or more stringent loan terms.

2. Equipment leasing

Equipment leasing allows your businesses to rent equipment for a specific period, usually 12 to 60 months. 

Instead of purchasing the equipment outright, the business makes regular payments to use it for the lease term.

At the end of the lease, you usually have the option to return the equipment, renew the lease, or, in some cases, purchase the equipment at a reduced price.

There are two types of equipment leases:

• Operating lease: This is more like renting the equipment for a shorter term (12 to 36 months), and at the end of the lease, the equipment is returned to the lessor. It’s often used for equipment that becomes obsolete quickly, like technology or medical devices​.
• Finance lease (Capital Lease): A finance lease is a longer-term lease (up to 72 months), and at the end of the lease, the business may have the option to buy the equipment. This type of lease is treated more like an ownership agreement for tax purposes. Businesses can claim depreciation and interest deductions.

Key features of equipment leasing:

• Lower upfront costs: This is helpful for startups or businesses that might not have the capital to purchase expensive equipment. Leasing allows you to spread the cost over time, preserving your cash flow for other critical expenses​.
• Flexible payment terms: Lease payments are fixed and can be structured in various ways—monthly, quarterly, or annually—based on your agreement. However, the total cost of leasing may be higher in the long run compared to purchasing​.
• End-of-lease options: At the end of the lease term, businesses usually have a few options:
  • Return the equipment: Useful if the equipment has become obsolete or is no longer needed.
  • Renew the lease: This can provide continued access to equipment without ownership.
  • Purchase the equipment: Some leases offer a buyout option, often at a reduced price​.
• No maintenance worries: In many cases, the lessor is responsible for maintaining the equipment during the lease term. If the equipment malfunctions, they may repair or replace it, relieving the lessee of additional costs​.

Pros and cons of equipment leasing

Pros

• Lower upfront investment: Leasing allows businesses to acquire equipment without a significant initial investment. This is valuable for cash-strapped startups​.
• Upgrading flexibility: Leasing is ideal for industries that rely on rapidly evolving technology. It’s easier to upgrade to newer models when leasing compared to buying​.
• Tax deductibility: Lease payments are often fully deductible as a business expense, providing potential tax advantages.
• Conservation of cash flow: Fixed, predictable payments make budgeting easier and help preserve cash for other investments.

Cons

• No ownership: At the end of the lease, you don’t own the equipment (unless you opt for a lease with a buyout option).
• Higher long-term cost: While the initial payments are lower, the total cost of leasing may be higher than purchasing outright, especially over long lease terms​.
• Restrictions on usage: Some leasing agreements include maintenance obligations or limited customization options, which can be a downside depending on your business’s needs​.

3. Lines of credit

Unlike a traditional loan, which provides a lump sum upfront, a line of credit provides ongoing access to funds up to a pre-approved limit.

You only pay interest on the amount you use. It’s a highly adaptable option for businesses with fluctuating equipment needs or seasonal cash flow variations.

This financing model works similarly to a credit card: you can draw funds, repay them, and borrow again up to your credit limit without reapplying.

It’s a revolving credit facility, allowing you to manage short- and long-term equipment purchases over time.

Key features of equipment lines of credit:

• Flexibility: You can draw on the credit as necessary. You’re not locked into borrowing a fixed amount all at once.
• Repayment terms: Some lenders require repayment within 12 to 24 months, while others offer extended terms based on your business’s cash flow and creditworthiness. Each withdrawal can be repaid over time, and the credit becomes available again once repaid.
• Variable interest rates: Most lines of credit come with variable interest rates, which fluctuate depending on market conditions. While variable rates can sometimes be lower, they can also increase if the Prime Rate rises, affecting repayment costs.
• Fees and costs: Common fees include:
  • Annual fees: Ranging from $100 to $200.
  • Origination fees: Charged at the start, often around 1% to 3% of the loan amount.
  • Draw fees: Some lenders charge a small fee each time you withdraw from the line of credit​

Pros and cons of an equipment line of credit

Pros

• Ongoing access to capital: Once approved, you can draw funds as needed without reapplying for a new loan each time.
• Only pay for what you use: You only pay interest on the amount you draw, not the entire credit limit, which helps control costs.
• Flexibility: Ideal for businesses with fluctuating equipment needs or ongoing maintenance and upgrades.
• Builds credit: Using and repaying your line of credit responsibly can help strengthen your business’s credit profile​.

Cons

• Variable interest rates: Rates fluctuate based on market conditions, leading to unpredictable costs.
• Collateral requirements: Secured lines of credit may require you to pledge business assets or the equipment itself, increasing your risk if you default​.
• Fees: Some lines of credit come with fees for withdrawals, annual maintenance, or early repayment, which can add up over time​.

4. SBA loans

SBA loans, backed by the U.S. Small Business Administration (SBA), offer low interest rates and long repayment terms.

So, basically, with an SBA loan, you’re not getting the money directly from the Small Business Administration. They’re guaranteeing a portion of that loan to the lender. It’s like having like a co-signer almost.

It’s the government vouching for you.

They are attractive for businesses that may not qualify for traditional loans.

There are different types of SBA loans for equipment financing:

1. SBA 7(a) loans

• The SBA 7(a) loan is the most common type of SBA loan, accounting for about 80% of all SBA lending. It can be used for various purposes, including purchasing equipment, working capital, and real estate.
• Businesses can borrow up to $5 million.
• Maximum loan maturity is 60 months.
• Interest rates range from around 11.5% to 15%.
• The equipment serves as collateral, reducing the need for additional personal assets.

2. SBA 504 loans

• The SBA 504 loan program funds major fixed assets that promote business growth and job creation.
• Repayment terms are longer repayment periods — 10-, 20-, and 25-year maturity terms.
• Best suited for substantial capital investments in fixed assets like heavy machinery.

3. SBA microloans

• Targeted at smaller businesses or startups, SBA microloans fund equipment purchases with a maximum limit of $50,000.
• Interest rates range from 8% to 13%.
• Repayment terms is between five and seven years. The maximum repayment term for an SBA microloan is capped at seven years.

5. Alternative lenders

Alternative lenders are non-traditional financing sources that provide loans to businesses that may not qualify for traditional bank loans due to lower credit scores, shorter time in business, or a need for faster funding. 

They offer financing options such as equipment loans, lines of credit, merchant cash advances, and invoice factoring. 

These lenders operate primarily online, making the application and approval processes quicker and more streamlined than traditional banking.

Some notable examples of alternative lenders specializing in equipment financing include:

Lender	Top features
Blue Bridge Financial	It specializes in equipment loans and leasing, providing quick funding and flexible terms for businesses with varying credit profiles. You can get up to $150,000. To qualify, you must have been in business for 6 months.
National Funding	Focuses on fast, flexible funding options for equipment purchases. They have an 85% approval rate. Rates start at 3.75%*, and terms range from 1 to 7 years. They give you a decision within 48 hours.
SMB Compass	Provides equipment financing solutions with a streamlined application process catering to small and medium-sized businesses. Rates start at 5.99%, and loan amounts range from $25,000 to $5,000,000.
SBG Funding	Offers lending options for businesses across the UK. As of 2024, they have helped 140,000 businesses borrow over £15 billion. You get asset finance up to £5 million with terms ranging from 1 to 7 years.
Funding Circle	Offers lending options for business across the UK. As of 2024, they have helped 140,000 businesses borrow over £15 billion. You get asset finance up to £5 million with terms ranging from 1 to 7 years.

Key features of alternative lenders

• Faster turnaround: Businesses can often receive funding within 24 to 48 hours.
• Simplified applications: The application process is significantly less cumbersome than traditional bank loans. Business owners don’t need to provide extensive documentation like tax returns or financial statements. Instead, some lenders approve loans based on digital access to bank statements​.
• Higher interest rates: While alternative lenders offer speed and flexibility, they often charge higher interest rates compared to banks. The rates range from 6% to 36%, depending on your credit score, loan term, and the specific lender​.
• Flexible loan options: Alternative lenders provide many loan options, including lines of credit, short-term loans, and asset-backed loans. Some even offer financing based on future receivables, such as a merchant cash advance, which allows businesses to borrow against future credit card sales.
• No restrictions on fund usage: Many alternative lenders do not restrict your use of funds. You get the flexibility in managing your working capital or investing in equipment.

Pros and cons of using alternative lenders

Pros

• Quick funding: Perfect for businesses needing rapid access to capital.
• Less stringent requirements: It’s easier for businesses with lower credit scores or limited operating history to qualify.
• Variety of loan options: Flexible options like merchant cash advances, short-term loans, and equipment financing.
• No collateral: Many alternative loans don’t require collateral or only require the equipment as security​.

Cons

• Higher interest rates: You’ll often pay more over time than traditional loans, particularly if you have a lower credit score.
• Frequent payments: Some loans, like merchant cash advances, require daily or weekly payments, which can strain cash flow.
• Shorter loan terms: Terms are typically shorter, meaning higher monthly payments than traditional financing​.

Final thoughts

Equipment financing offers options for every business. You can choose between the flexibility of leasing, the adaptable nature of a line of credit, the favorable terms of an SBA loan, or the quick access provided by alternative lenders.

The key is to weigh the pros and cons of each financing method against your unique situation. Think about your cash flow, how quickly your equipment may become outdated, and your risk tolerance.

Don’t rush into a decision. Take your time to compare rates, repayment terms, and any associated fees. Most importantly, keep your “why” at the forefront—how will this equipment help your business grow?

FAQs: Types of equipment financing