Understanding Equipment Loans: How They Work and Who They Benefit

Equipment is the backbone of many businesses – from tractors on a farm to high-tech machinery on a factory floor. However, purchasing such equipment outright can be prohibitively expensive, especially for small businesses or individual professionals. That’s where equipment loans come into play.

Equipment loans allow companies and entrepreneurs to acquire necessary machinery and tools by borrowing funds and spreading payments over time, rather than paying the full cost up front. This type of financing is extremely common in business; in fact, industry reports show that a large portion of business equipment investments (over half, by some estimates) are financed through loans or leases rather than paid in cash.

By utilizing equipment loans, businesses can preserve cash flow while still obtaining the equipment they need to operate and grow. (Equipment loans, also known as equipment financing, exist worldwide with similar principles, though specific terms and programs may vary by country.)

In this comprehensive guide, we’ll explain what equipment loans are and how they work, the different types available, who can benefit from them, and key features to be aware of. We’ll also discuss the typical application process, pros and cons, how equipment loans compare to leasing, and provide real-world examples.

Finally, we’ll answer frequently asked questions and offer tips to help you choose the right equipment financing solution. Whether you’re a small business owner, a farmer looking to mechanize your operations, or a professional needing specialized tools, understanding equipment loans can help you make informed decisions to support your goals.

What Is an Equipment Loan?

An equipment loan is a type of business loan specifically used to purchase equipment or machinery needed for operations. In an equipment loan, the lender provides funds to the borrower to buy the equipment, and the borrower repays the loan over time with interest, typically in fixed monthly installments.

One defining feature of an equipment loan is that the equipment itself usually serves as collateral for the loan. This means if the borrower fails to repay, the lender has the right to seize or repossess the equipment to recover their losses.

Equipment loans are a form of asset-based financing, similar in concept to an auto loan or mortgage but for business assets. They can be used to finance a wide range of tangible items, including:

Heavy machinery: e.g. excavators, manufacturing machines, tractors
Vehicles: e.g. delivery trucks, farm equipment, company cars
Technology and office equipment: e.g. computers, servers, medical devices, restaurant ovens
Specialized tools: e.g. dental or lab equipment, construction tools, commercial kitchen appliances

Because the financed equipment acts as collateral, lenders often see equipment loans as less risky than unsecured loans. This typically makes it easier for businesses to qualify or to get better terms, since the lender can recover the asset in case of default. However, borrowers do not fully own the equipment outright until the loan is paid off (though they typically hold title with a lien in favor of the lender).

Over the loan term, the borrower will pay interest on the amount financed, making the total cost higher than the sticker price of the equipment – but the benefit is that payments are spread out, making costly equipment affordable on a monthly budget.

How Equipment Loans Work

Equipment loans generally work in a straightforward way: a business or individual identifies a piece of equipment they need, a lender provides a loan to purchase that equipment, and the borrower repays the loan over a set term. Here are key points on how the process works in practice:

Loan Amount and Value: Lenders typically will loan an amount up to a certain percentage of the equipment’s value. For example, a lender might finance 80% to 100% of the equipment cost, requiring the borrower to cover the rest as a down payment. Some lenders even offer “100% financing” for qualified buyers, meaning no down payment is required (though this may come with higher interest or stricter credit requirements).
Interest Rates: The interest rate on an equipment loan can be fixed or variable. Many equipment loans have fixed interest rates, so the monthly payment stays constant over time, which helps with budgeting. The rate offered depends on factors such as the borrower’s credit score, business financial health, the type and age of equipment, and overall market interest rates.

As of 2025, interest rates for equipment financing can vary widely – well-qualified borrowers might secure rates in the single digits (e.g. 6–9% APR), whereas newer businesses or those with credit challenges might see higher rates (potentially in the mid-teens or above). The recent trend of rising interest rates globally in 2022–2024 has made borrowing more expensive than it was a few years prior, so it’s important to shop around for the best rate.
Loan Term: Equipment loan terms typically range from short-term (as little as 1–2 years) up to the expected useful life of the equipment. Commonly, terms of 3 to 7 years are seen for many types of equipment.

Expensive, long-lasting assets (like heavy machinery or commercial aircraft) might have longer terms (10 or even 15 years), whereas technology that may become obsolete sooner (like computer equipment) would have shorter terms. Lenders often align the loan term with how long the equipment will provide value; you generally don’t want to still be paying off a machine that has broken down or become outdated.
Repayment Schedule: Most equipment loans are paid in equal monthly installments of principal and interest, much like a car loan or mortgage. Some specialized loans might allow seasonal payment schedules (for instance, a farm equipment loan could have payments due after harvest season when the farmer has cash flow), but monthly payments are the norm.

Each payment reduces the outstanding balance, and once the term is complete and all payments are made, the borrower owns the equipment free and clear.
Collateral and Security: As mentioned, the purchased equipment itself serves as collateral. During the loan, the lender typically places a lien on the equipment (and sometimes files a UCC-1 financing statement in the U.S. to publicly record their interest). If the borrower defaults (fails to repay), the lender can repossess the equipment and sell it to recoup the remaining loan balance.

Because of this security, equipment loans are secured loans, and lenders may be more willing to extend credit or offer larger amounts than they would for an unsecured loan. However, if the equipment’s value doesn’t fully cover the remaining debt (due to depreciation or a distressed sale price), the borrower might still be liable for the difference after repossession.
Ownership: With an equipment loan, ownership of the equipment usually transfers to the borrower at purchase (or to their business entity), albeit with the lender holding a lien. This is different from leasing (covered later), where the lender or lessor typically owns the asset during the lease term.

Since you own the equipment with a loan, you are responsible for maintenance, insurance, and any other ownership costs. The benefit is you can customize or use the equipment as you see fit, and you retain any residual value (salvage or resale value) after the loan is paid.
Example: To illustrate, imagine a small construction firm wants to buy a new backhoe for $50,000. They might take an equipment loan for 90% of the purchase price (i.e., borrow $45,000) and pay a 10% down payment ($5,000) upfront. If the loan term is 5 years at a fixed 8% interest rate, the company will pay roughly $912 per month.

Over the 5 years, the total paid would be about $54,720, which includes around $4,720 in interest. In return, the company gets immediate use of the backhoe to generate revenue, and after making all payments, they own the equipment outright. If the backhoe helps them earn much more than the monthly payment, the loan is a productive investment.

Equipment loans thus enable businesses to spread out the cost of vital assets over their useful life. This preserves working capital and cash on hand for other expenses (like payroll, inventory, or emergencies) rather than tying it all up in a one-time equipment purchase.

Types of Equipment Loans

Equipment financing is not one-size-fits-all. Several types of equipment loans and financing arrangements exist to suit different needs and borrower profiles. Below are some common types and sources of equipment loans:

Traditional Bank Equipment Loans: Many banks and credit unions offer term loans specifically for equipment purchases. These loans typically have fixed interest and a set term. Banks may prefer to work with established businesses that have good credit and solid financials. If you qualify, bank loans often have competitive interest rates and clear terms.

However, banks might require more documentation and have a slower approval process than some alternative lenders. They may also ask for a down payment (e.g., 10-20%) and possibly additional collateral or a personal guarantee, especially for small businesses. Traditional bank loans are a good option for businesses that meet the credit criteria and can wait a few weeks for approval and funding.
SBA Loans (Government-Backed Loans): In the United States, the Small Business Administration (SBA) guarantees loans that can be used for equipment purchases, among other purposes. The two main SBA loan programs that often finance equipment are SBA 7(a) loans and SBA 504 (CDC/504) loans.
- SBA 7(a) loans are general-purpose small business loans provided by banks and other lenders, but partially guaranteed by the SBA. Businesses can use 7(a) loan funds to buy equipment, along with other uses (working capital, refinancing, etc.). The advantage is potentially lower down payments and longer terms (sometimes up to 10 years for equipment) than a standard bank loan. Interest rates are typically variable and tied to the Prime rate (with a cap), and the SBA sets maximum rates lenders can charge.
- SBA 504 loans are designed for major fixed asset purchases like real estate or heavy equipment. A 504 loan actually involves two loans: one from a bank (roughly 50% of the project cost), and one from a Certified Development Company (about 40% of the cost, backed by the SBA), with the borrower putting in 10% equity (these percentages can vary).
  
  504 loans often have fixed interest rates for the CDC/SBA portion and can offer long terms (10 or 20 years) for equipment. They can be a great option for financing larger pieces of equipment at low interest rates, but the application process is more complex and can take longer. Also, they are typically restricted to purchases that promote business growth and job creation (due to the development aspect).
- Other government programs: Aside from the SBA, there are occasionally state or local government loan programs or grants to help businesses. For example, a state economic development agency might offer a low-interest loan program for manufacturing equipment in that state.
  
  For farmers, government bodies like the USDA’s Farm Service Agency offer loan programs that can be used for farm equipment purchases. Internationally, many countries have similar development loan programs or government-backed financing for small businesses and agriculture.
Equipment Finance Agreements and Online Lenders: In recent years, many online lenders and specialty financing companies offer equipment loans or equipment finance agreements (EFAs). These function similarly to traditional loans (with ownership going to the borrower), but the lenders may be more flexible or faster in their approval process.

Often, these companies can provide funding within days and may work with businesses that have less-than-perfect credit (sometimes at higher interest rates). They might not call their product a “loan” for legal reasons, instead using terms like finance agreement, but effectively it’s the same: you borrow money to buy equipment and repay over time. Examples of such financing sources include direct equipment finance companies or even financing arms of equipment vendors.
Vendor Financing and Dealer Loans: Many equipment manufacturers or dealers have in-house financing or partnerships with lenders to help customers finance equipment. For instance, if you’re buying a piece of farm machinery from a dealer, the dealer might offer an installment payment plan or loan through an affiliated finance company. Big manufacturers often have captive finance divisions (like John Deere Financial or Caterpillar Financial Services) that specialize in loans and leases for their equipment.

These can be convenient since the application is often done at the point of sale, and they may have promotional rates (even 0% financing for a period) to entice buyers. The terms can vary widely; sometimes they are very competitive, other times the convenience might come with slightly higher costs or be limited to financing that manufacturer’s products.
Finance Leases / Hire Purchase: Though technically a lease is not a loan (ownership is different), some financing arrangements blur the lines. A finance lease (also known as a capital lease) or a hire purchase agreement allows a business to essentially finance the purchase of equipment over time and typically gain ownership at the end of the lease term (either automatically or by paying a nominal amount).

These are common in some countries (for example, hire purchase agreements are often used in the UK and other Commonwealth countries for equipment and vehicles). For the purposes of this article, the end result is similar to an equipment loan: you acquire the equipment and pay over time.

The difference is legal ownership during the term and tax/accounting treatment can differ. (We will compare loans vs. leasing in a later section.) It’s worth noting that this is another form of financing one might encounter, which has a similar outcome of owning equipment through installment payments.
Other Alternative Financing: Sometimes businesses use alternative credit products to fund equipment. For smaller equipment needs, a business credit card or line of credit might suffice (though interest could be higher and not fixed).

There are also equipment sale-leaseback arrangements: if a company owns an asset free and clear, they can sell it to a lender or leasing company for cash and then lease it back, which is a way to unlock cash from existing equipment. While not a loan per se, it’s another financing tool related to equipment.

Each type of equipment financing has its pros and cons. For example, SBA loans often have great terms but can take longer and involve more paperwork. Bank loans might be the cheapest option but harder to qualify for. Online lenders are faster and more accessible but may charge higher rates.

Vendor financing can be convenient and tailored to the equipment, but you should still compare the total cost to other options. It’s important to evaluate which type aligns best with your business size, credit profile, and urgency for obtaining the equipment.

Who Can Benefit from Equipment Loans

One of the advantages of equipment loans is their broad applicability. They can benefit a wide range of borrowers across different industries and professions. Here are some groups that commonly use equipment loans, and how these loans can help them:

Small Businesses and Startups: Small and mid-sized businesses often lack the upfront capital to buy expensive equipment outright. Whether it’s a restaurant needing commercial kitchen appliances, a construction contractor needing a backhoe, or a tech startup needing servers, equipment loans enable these businesses to get up and running without crippling their cash reserves.

For new businesses or startups, equipment loans can be one of the more accessible forms of financing because the equipment itself acts as collateral. However, very new companies might still need the owner to provide a personal guarantee or a down payment to secure the loan, as lenders want some assurance given the limited business history.

By financing equipment, small businesses can start generating revenue with the new asset and essentially have the asset “pay for itself” over time through the income it helps produce.
Large Enterprises: Even very large companies and corporations use equipment financing. The reasons might be slightly different – a large firm might afford to pay cash but chooses financing to optimize their cash flow, take advantage of low interest rates, or for accounting reasons.

For example, an airline might finance the purchase of new airplanes or a shipping company might take loans for new cargo trucks or ships. These are multimillion-dollar assets; financing allows the cost to be spread as the asset is used to earn revenue. Large companies often have dedicated financing arrangements and can secure favorable terms due to their credit strength.

They also might issue corporate bonds or other debt specifically for capital expenditures (a form of self-financing). Nonetheless, the principle is the same: using borrowed money to acquire equipment while preserving cash for other uses or investments.
Farmers and Agricultural Businesses: Farming is equipment-intensive (tractors, harvesters, irrigation systems) and these items can be extremely costly. Many farmers rely on equipment loans or leases to afford the latest agricultural machinery. The benefit is increased efficiency and productivity (e.g. a more advanced combine harvester can process crops faster, improving yields and saving labor).

Agricultural equipment loans are often tailored to farmers, sometimes with seasonal payment schedules aligned to crop cycles or with government-supported interest rates. For instance, in the U.S., farmers might obtain financing through Farm Credit System lenders or USDA programs that provide favorable terms to support the agriculture sector. Equipment loans for farmers can literally be the difference between scaling up production or not, thus directly impacting their income.
Individual Professionals and Self-Employed Individuals: Not just businesses, but also professionals like independent contractors or sole proprietors may need equipment loans. Think of a freelance videographer financing a high-end camera and editing suite, or a food truck operator financing the kitchen appliances inside the truck.

Another example is medical professionals: a doctor opening a small clinic might need to finance X-ray or ultrasound machines; a dentist might finance expensive dental chairs and imaging equipment. Even though these individuals run smaller operations, they can use equipment loans to get the professional tools they need without paying all at once.

Often, lenders will still treat these as business loans (you may need to apply under a business name or use a DBA), but essentially the individual is the business in these cases. They benefit similarly by preserving personal or business savings and paying off the equipment as their practice earns income.
Nonprofits and Public Sector: While not “businesses” in the profit-making sense, nonprofits or government agencies also utilize equipment financing. For example, a nonprofit hospital might finance a new MRI machine, or a city government might use a lease-purchase arrangement for new public transit buses or fire trucks.

Public entities may issue municipal bonds for large equipment, but smaller agencies might use lease-purchase contracts. The audience for this article is primarily businesses and professionals, so this is just to note that even beyond the private sector, equipment financing is a widespread practice to manage large capital expenses.

In essence, anyone who needs expensive equipment and prefers to pay over time rather than upfront can benefit from an equipment loan – provided they can qualify for it. The key benefits across all these groups include maintaining cash flow, enabling growth or improved operations with new equipment, and potentially taking advantage of tax deductions (since interest payments and depreciation on financed equipment can often be written off as business expenses).

Different borrowers might favor different types of equipment financing. For instance, a small startup might opt for an online equipment lender for speed, whereas a farmer might use a specialized agricultural lender. But the underlying reason to use an equipment loan is common: to overcome the cost barrier of needed tools and machinery by paying gradually as benefits are realized.

Key Features and Terms of Equipment Loans

Before taking an equipment loan, it’s important to understand the key features, terms, and conditions that come with this kind of financing. Here are some of the fundamental terms and aspects you will encounter:

Loan Principal (Amount): This is the amount you borrow to purchase the equipment. It can range from just a few thousand dollars for small tools up to millions for heavy machinery or fleets of vehicles. Lenders often have minimum and maximum loan amounts. For example, some banks might not finance loans below $10,000, while an SBA 504 loan could finance equipment worth millions (with sufficient collateral and cash flow).
Down Payment: Many equipment loans require the borrower to pay a portion of the equipment cost upfront. A typical down payment might be around 10% to 20% of the purchase price.

The exact requirement depends on the lender and the borrower’s creditworthiness; some lenders advertise “no down payment” or 100% financing options, but those are usually reserved for strong borrowers or specific promotional deals. Paying a larger down payment can sometimes help secure a lower interest rate or better terms, since the lender is taking on less risk.
Interest Rate (APR): The annual percentage rate on the loan can be fixed (stays the same over the life of the loan) or variable (changes with market rates, though variable equipment loans are less common for small purchases). The APR accounts for interest and any lender fees.

Rates depend on factors like credit scores, equipment type (new equipment might get better rates than used, because new equipment is easier to value and has a longer useful life as collateral), and the overall interest rate environment. Be sure to clarify if the rate is fixed or if it could adjust, and whether it’s simple interest or if compounding affects the repayment in any unusual way (most standard business loans use amortizing simple interest).
Loan Term: This is the length of time you have to repay the loan. It is often expressed in months (e.g., 36 months, 60 months, 84 months). The term will usually correlate with the equipment’s expected life; shorter terms mean higher monthly payments but less interest paid overall, whereas longer terms reduce monthly costs but increase total interest.

When negotiating a loan, ensure the term isn’t longer than the time you expect to use the equipment productively. Common terms are 3, 5, or 7 years for many loans, but it can vary outside that range.
Collateral and Liens: The equipment being purchased is the primary collateral. The lender will usually file a lien (in the U.S., a UCC lien on business assets, often specifically on that equipment) to secure their interest. This means you generally cannot sell the equipment without the lender’s permission until the loan is paid (or you’d have to pay off the loan upon sale).

Some equipment loan agreements might also include a blanket lien on all assets of the business (not just the specific equipment) especially if the loan is through a bank or if the equipment’s resale value is expected to depreciate quickly. It’s important to read the loan documents to understand what exactly is pledged as collateral.
Personal Guarantee: For small businesses, especially those that are owner-operated or have short financial histories, lenders often require a personal guarantee from the owners. This means the owners promise to personally repay the debt if the business cannot, making them personally liable. If the business entity fails or defaults, the lender can pursue personal assets of the guarantor (depending on local laws).

Not all loans require this – larger companies can often borrow without personal guarantees, and some financing companies market “no PG” loans (usually at higher cost or with strong collateral). Be aware that a personal guarantee increases risk to the individual because it bypasses the liability protection of an LLC or corporation if things go wrong.
Fees and Costs: Apart from interest, equipment loans may come with various fees. Common ones include origination fees (a fee for processing the loan, often 1-3% of the amount), documentation fees, or closing costs. Some lenders may charge a fee if you pay off the loan early (a prepayment penalty or yield maintenance fee) because they want to ensure a certain return.

Always ask for a breakdown of fees and the annual percentage rate (APR) which should include those fees, to compare true costs between lenders. Additionally, there might be small costs such as UCC filing fees or equipment appraisal fees (particularly for used equipment), though these are usually minor.
Insurance Requirements: Because the equipment is collateral, lenders typically require that you maintain insurance on it. This ensures that if the equipment is stolen, damaged, or destroyed, the lender’s interest is protected by insurance proceeds.

The loan agreement may require you to list the lender as a loss payee on the insurance policy (so they are paid first if there’s an insurance claim). Failing to maintain proper insurance could put you in default on the loan, so factor insurance premiums into the cost of owning the equipment.
Default and Repossession Terms: The contract will spell out what constitutes default beyond just missed payments (for instance, things like bankruptcy, providing false information on the application, or even breaking certain covenants might trigger default). It will also outline the lender’s rights if default happens.

Typically, after a certain grace period of non-payment, the lender can repossess the equipment. They might also accelerate the loan (demand the full remaining balance immediately). Some agreements allow for cure periods where you can catch up on payments with a late fee. But if worst comes to worst, they will take the asset and possibly pursue you for any remaining balance if the sale of the equipment doesn’t cover the debt plus any legal or repossession costs.

On the flip side, some lenders might work with borrowers to restructure terms if it’s a temporary hardship, because repossessing and selling equipment can be a hassle and they might recover less that way. However, legally they have the right to recover their losses.
Tax Implications: Equipment loans can have significant tax implications (usually favorable). In many jurisdictions, business loan interest is tax-deductible as a business expense. Additionally, when you purchase equipment (even with a loan), you may be able to deduct the cost of the equipment through depreciation.

For example, in the U.S., businesses have access to Section 179 expensing and bonus depreciation which allow large portions or even 100% of the equipment cost to be written off in the year of purchase (subject to annual limits). In fact, the 100% bonus depreciation that was in effect from 2018–2022 is now being phased down (e.g., reduced to 80% in 2023, 60% in 2024, and so on) under current tax law.

Even though the equipment is financed over time, the business can still take these tax benefits as if it bought the asset outright. This can significantly improve the after-tax cost of financing equipment. (By contrast, if you lease equipment and it’s treated as an operating lease, you typically deduct the lease payments as a business expense, and you do not claim depreciation.)

The nuances of tax treatment can get complex, so it’s wise to consult a tax professional, but it’s important to know that equipment purchases often come with tax benefits which effectively reduce their cost.
Equipment Condition (New vs. Used): Whether the equipment is new or used can affect the loan terms. Some lenders prefer new equipment because it has a clear value and warranty, and will retain value longer. Used equipment might be financed for a shorter term or a lower percentage of its purchase price because it may have less useful life or a less certain resale value.

Still, many lenders will finance used equipment, especially if it’s a common type of asset that holds value (like used vehicles, tractors, etc.). The age of the equipment may have a cutoff; for example, a lender might not finance a vehicle more than 8-10 years old, or they might require it to be in good condition verified by an appraisal.
Cosigners or Co-Borrowers: In some cases, having a cosigner or co-borrower with stronger credit (or another business partner) can help in getting approved or securing better terms. This person or entity would then share responsibility for the debt. For instance, two business partners might both sign on an equipment loan, or a parent company might cosign for a subsidiary.
Refinancing Options: If interest rates drop or if your financial situation improves significantly after a couple of years, you might consider refinancing your equipment loan (taking a new loan to pay off the old one at a better rate or different term).

Not all lenders allow refinancing of their own loans without penalties, so check if there’s any prepayment penalty or lock-out period. But it can be a way to save on interest if conditions change in your favor. Some businesses also refinance to extend the term and reduce payments, although that usually increases total interest cost.

As you can see, equipment loans come with a variety of terms. When evaluating a loan offer, pay attention to more than just the monthly payment. Consider the interest rate, term length, any fees, and your total payout over the life of the loan.

Also be mindful of obligations like insurance and what happens if you need to pay it off early or if your business situation changes. The key is to choose a loan structure that aligns with your business’s cash flow and the expected return from the equipment.

Application Process for an Equipment Loan

Applying for an equipment loan is in many ways similar to applying for any business loan, but here are the typical steps and considerations involved, in a logical order:

Evaluate Your Equipment Needs: First, clearly identify what equipment you need to purchase and how it will benefit your business. Lenders will often ask for an invoice or quote for the specific equipment, so you should have a particular item (or at least a specific budget and category of equipment) in mind. Also consider whether buying is the best option or if leasing (or buying used vs. new) might be more cost-effective for your situation.
Budget and Credit Check: Examine your budget to determine how much you can afford as a down payment and for monthly loan payments. Use an equipment loan calculator or spreadsheet to estimate payments for various loan amounts and terms. It’s also wise to check your business and personal credit scores in advance, since those will influence your loan terms. If there are any credit issues, try to address them beforehand or be prepared to explain them. Knowing your credit standing will also help determine which lenders to approach (some lenders have minimum credit score requirements).
Research Lenders and Loan Options: There are many potential sources for an equipment loan. Research different banks, credit unions, online lenders, and equipment financing companies. Compare their interest rates, loan terms, fees, and requirements. For example, some lenders specialize in certain industries or types of equipment.

If you have existing banking relationships, see if your bank offers a program for equipment loans. You might also consult industry associations or colleagues about recommended financing sources (e.g. farmers might check with their local Farm Credit lender, doctors might look at specialized medical equipment financiers, etc.).

During this stage, you may get pre-qualification quotes from multiple lenders. Many lenders can give an estimated rate/term with a soft credit inquiry (which doesn’t affect your credit score). This lets you compare offers before formally applying.
Gather Documentation: The exact documents required will vary by lender, but typically you should prepare:
- Business financial statements: Profit & Loss (income statement) and balance sheet for the past 1-3 years, if available.
- Business tax returns: Often 1-3 years of business tax returns are requested (for established businesses).
- Bank statements: Recent business bank account statements (to show cash flow and balances, often last 3-6 months).
- Personal financials: For small businesses, personal tax returns of the owners/guarantors for the past couple of years may be required, and possibly a personal financial statement.
- Equipment quote or invoice: A formal quote, purchase order, or proforma invoice from the equipment dealer/manufacturer detailing the equipment and its cost.
- Business details: Information about your business (e.g. your Employer ID Number, formation documents, any required licenses, etc.).
- Business plan or projections (if applicable): If your business is new or the loan is large relative to your existing operations, lenders (especially SBA loans) might want to see a business plan or financial projections to understand how the equipment will increase revenue or productivity.
- Identification: Copies of driver’s licenses or IDs for the business owners.
Having these documents ready in advance will make the application process smoother. Some online lenders have more streamlined requirements (maybe just bank statements and basic financial info), whereas banks and SBA lenders will require a fuller documentation package.
Submit the Loan Application: Fill out the lender’s application form. This can often be done online or in person at a bank. The application will ask for details about your business (legal name, address, industry, time in business, number of employees, annual revenue, etc.) and the specifics of the loan you are seeking (amount, purpose, equipment details).

Be thorough and accurate, because inconsistencies or errors can slow down approval. If working with a dedicated loan officer, don’t hesitate to ask questions while filling out the paperwork.
Underwriting and Lender Review: After submission, the lender’s underwriting team reviews your application and documentation. They will analyze your financial ratios, credit history, and possibly the value of the equipment. They may contact you with questions or requests for additional info. For example, they might ask for clarification on a dip in revenue, or request an updated equipment quote if the one provided is a bit older.

In some cases, the lender may also want an appraisal or inspection of the equipment (more common for used equipment or very expensive assets). If it’s a private-party sale (not from a dealer), they might require more due diligence on the equipment’s condition and title.

The underwriting process timeline can range widely – an online lender might approve in a day or two, while an SBA loan or bank loan can take several weeks. Stay responsive to any inquiries during this period to keep things moving.
Loan Approval and Offer: If approved, the lender will extend a loan offer (often called a commitment or term sheet) that outlines the terms: the approved loan amount, interest rate, term length, collateral, required down payment (if any), and any special conditions. Review this offer carefully.

You are not obligated to accept it if it doesn’t meet your needs or if you have other offers. Compare the annual percentage rate (APR) and total cost among any offers you have. If something was different than expected – say the lender approved a smaller amount or requires more down payment – you can ask if there’s flexibility or what drove that decision.

Sometimes lenders might increase the amount or adjust terms if you negotiate or if you can offer additional collateral/guarantees. If you have multiple approvals, you can leverage them (e.g., tell Lender A that Lender B offered a lower rate and see if they can match).
Accepting the Loan and Documentation: Once you decide to proceed with a loan, you’ll sign the formal loan agreement and any other documents required to finalize the deal. This may include a promissory note, security agreement (detailing the collateral), personal guarantee forms, and various disclosures. If it’s an SBA loan, there will be SBA-specific documents as well.

Review all documents and ensure you understand your obligations. For example, check if there’s a prepayment penalty, confirm the interest rate is as agreed, and note any covenants (like providing annual financial statements or maintaining insurance). After signing, you may need to provide proof of insurance on the equipment listing the lender as loss payee.
Down Payment and Funding: At closing, if a down payment is required, you will need to pay it. Often the borrower pays their portion directly to the equipment seller, and the lender provides the remainder. The lender will then disburse the loan funds. In many cases for equipment purchases, the lender pays the vendor directly (rather than giving the cash to you) to ensure the funds go to purchase the equipment.

The vendor will then arrange delivery of the equipment to you. If the loan was for equipment you already bought (refinancing or reimbursement), the lender will simply fund you or pay off the interim financing. Be aware of any upfront fees that might be deducted from the loan amount – for example, a 2% origination fee on a $50,000 loan might mean you only receive $49,000 from the lender (with $1,000 considered a fee you paid).
Acquire Equipment and Finalize Lien: Once funded, you can take possession of the equipment from the seller (if you haven’t already). Ensure any titles or ownership documents are properly transferred to your name/business and that the lender’s lien is noted where appropriate (for example, in the case of a vehicle, the title will list the lender as a lienholder).

The lender or their agent may file a UCC financing statement for the equipment in your state – this is usually automatic and just puts public notice of their lien. At this point, the loan is active and you are the owner-user of the equipment.
Repayment and Maintenance: Now it’s your responsibility to operate the equipment and make the loan payments on schedule. Typically, the first payment will be due one month after funding (unless the loan terms provided some payment deferral). It’s wise to set up automatic payments from your business bank account to avoid missing due dates. Continue to maintain and insure the equipment per the loan agreement.

The equipment should be kept in good working order as it’s both generating income for you and serving as the lender’s collateral. If any issues arise – for example, if the equipment breaks down for an extended period – communicate with the lender especially if it affects your ability to make payments.

In some cases, lenders might offer relief options, but usually only if they believe it’s a short-term issue and you have a solid history.
Loan Maturity and Payoff: Once you’ve made all the scheduled payments, the loan is paid off. Congratulations – you now own the equipment free and clear. The lender should send you documentation that the loan is satisfied. Make sure they also remove any liens (e.g., file a UCC termination statement and send you a lien release for your records).

If the equipment had a title (like a vehicle), you should receive a lien release or a new title without the lender’s name. At this point, you have no further obligations to the lender. You can continue using the equipment with no more payments, or you might decide to sell or dispose of it if it’s near the end of its useful life.

Many businesses, once a loan is paid off, will redirect those freed-up funds into savings for future equipment needs or even use it to finance another piece of equipment (either by taking a new loan or paying cash if they’ve saved enough).

Throughout the application process, communication and preparation are key. If you anticipate any challenges (like a past credit issue or a temporary dip in business finances), be upfront with the lender and provide explanations. Sometimes a well-explained situation (with documentation) can keep an application on track.

Also, keep the equipment seller in the loop if timing is critical – for example, let them know you are arranging financing and it’s approved, so they hold the equipment for you (some may require a deposit to do so). By being organized and proactive, you can increase your chances of a smooth and successful equipment loan process.

Pros and Cons of Equipment Loans

Like any financing option, equipment loans come with a set of advantages and disadvantages. It’s important to weigh these pros and cons when deciding if an equipment loan is the right choice for your business or situation.

Pros (Advantages of Equipment Loans)

Preserves Cash Flow: The most significant benefit is that you don’t have to pay the full cost of the equipment upfront. This preservation of cash helps you maintain working capital for day-to-day expenses, emergencies, or other investments. Paying over time in fixed installments can be more manageable and predictable for budgeting.
Immediate Access to Equipment: Equipment loans enable you to acquire critical machinery or tools when you need them, rather than waiting until you’ve saved enough capital. This can help in seizing business opportunities (e.g. taking on a new project because you now have the necessary equipment) or improving efficiency and revenue sooner than later.
Ownership and Equity: With a loan, you (or your company) own the equipment from the start, subject to the lender’s lien. As you pay down the loan, you build equity in the equipment. Once the loan is repaid, you have an asset that may still have value.

You can continue using it without loan payments, or potentially sell it and recover some money. Any increase in the equipment’s value (not typical for most equipment, but possible for certain assets) would benefit you, not the lender.
Collateral Is Built-In: Since the equipment itself serves as collateral, you typically don’t need to put up additional assets (like real estate or other property) to secure the loan. This can make equipment loans easier to obtain than unsecured loans or lines of credit, especially for small businesses.

Lenders have more confidence extending credit because they have the equipment as security, which could mean you qualify when you might not for an equivalent unsecured loan. (Keep in mind, some lenders might still require personal guarantees or blanket liens, but you usually aren’t pledging unrelated assets solely for the equipment loan.)
Potential Tax Benefits: Financing equipment can have tax advantages. You may be able to deduct the interest portion of your loan payments as a business expense, and you can also take depreciation deductions on the equipment since you own it.

In some cases, tax provisions like Section 179 allow you to deduct most or all of the equipment’s cost in the first year you buy it, even if you financed the purchase. These deductions can save you money on taxes, effectively offsetting some of the interest expense.
Fixed Payments (if fixed rate): Many equipment loans come with fixed interest rates, which means your payment is the same every month. This predictability is good for budgeting and removes interest rate risk (unlike a variable-rate loan that could become more expensive if rates rise). You know exactly what you’ll pay over the life of the loan, making financial planning easier.
Flexible Sources of Financing: As described in the types section, there are numerous lenders and programs available for equipment loans. This competition means you can shop around for the best deal or find a lender that understands your industry. It also means if you’re not having luck with one type of lender (say a bank), you might have success with another (like an online lender or vendor financing). Having options helps you tailor the financing to your needs.

Cons (Disadvantages of Equipment Loans)

Interest and Cost: By financing, you will pay more than the purchase price of the equipment once interest and fees are accounted for. The total cost of the equipment increases with financing. If interest rates are high or your credit is less than ideal, the financing charges can be substantial.

For example, financing a $100,000 piece of equipment over 5 years at a high interest rate could mean paying tens of thousands in interest. This is the trade-off for not paying everything upfront.
Debt and Liability: Taking a loan means taking on debt, which adds a fixed obligation to your business. You have to make those loan payments regardless of how your business is doing. If your revenue drops or the equipment doesn’t generate the expected benefits, you might struggle with payments.

Falling behind on an equipment loan can lead to default, which brings repossession risk and credit damage. Also, if you had to sign a personal guarantee, defaulting means the lender can come after your personal assets. So, an equipment loan does introduce financial risk that needs to be managed.
Depreciation/Obsolescence Risk: When you own equipment (via a loan), you bear the risk of it depreciating in value or becoming obsolete over time. You could be paying off a loan on equipment that is no longer useful or efficient if technology advances or if it breaks down beyond repair after warranty.

For fast-evolving technology or electronics, this is a particular concern – you might finance a piece of tech over 5 years, but a superior model might come out in 3 years, leaving you with old tech and remaining debt. With a lease, you could upgrade at the end of a short lease term; with a loan, you’re generally committed unless you sell the equipment (which might not cover what you owe if values have dropped).
Upfront Requirements: Loans may require a down payment and have closing costs or fees that you must pay out of pocket. Also, the process of applying can be time-consuming, especially for larger loans or those requiring SBA approval, which might slow down your ability to get the equipment quickly. If you need equipment urgently and can’t wait for loan processing or approval, this can be a disadvantage (though some lenders do offer fast-track approvals).
Maintenance and Other Costs: Ownership via a loan means you’re fully responsible for maintenance, repairs, insurance, and other costs of keeping the equipment operational. These costs can add up and are not covered by the lender (whereas, in some lease agreements, maintenance might be included or the lessor takes care of certain aspects). You need to factor these into the total cost of ownership. If the equipment breaks, you’re still on the hook for the loan payments even if it’s not usable until repaired.
Potential to Over-Leverage: If financing is easy to get, there’s a temptation to finance too many things at once. Over-leveraging (taking on too much debt) can strain your business.

Each equipment loan payment reduces your monthly cash flow and counts as debt on your balance sheet, possibly limiting your ability to borrow for other needs. Businesses should carefully consider how much debt is prudent. Just because you can finance something doesn’t always mean you should, if the return on that equipment is marginal.
Loan Restrictions: Some equipment loan agreements might have covenants or restrictions that could be inconvenient. For example, a lender might prohibit you from moving the equipment out of a certain area or country without permission (to ensure they can recover it easily if needed), or they might require you to keep certain insurance levels and perform regular maintenance.

While these aren’t usually too onerous, they are additional considerations. Also, if you wanted to sell the equipment before the loan is repaid, it’s complicated (you’d typically have to get the lender’s consent and pay off the loan from the sale proceeds).

In summary, equipment loans can be a powerful tool to enable growth and productivity, but they come at the cost of interest and obligations that need to be managed. The pros often outweigh the cons when the equipment is essential and will generate a return greater than the cost of financing.

However, if the benefit of the equipment is marginal or uncertain, the debt could become a burden. The decision should involve running the numbers (ROI analysis) and considering alternative options like leasing or renting. Always evaluate the specific situation: what’s the worst case if you take the loan and things don’t pan out, and can your business handle that risk?

Equipment Loans vs. Equipment Leasing

When looking to acquire equipment, two main financing options usually come to mind: taking an equipment loan (to buy the equipment) or leasing the equipment. Both have their merits, and the best choice depends on the situation. Let’s compare equipment loans and leases on key points:

Aspect	Equipment Loan (Buying)	Equipment Lease (Renting)
Ownership	You own the equipment (with a lender’s lien until paid off). Title is usually in your name/business from day one.	You do not own the equipment during the lease term. The lessor (financing company) owns it. You may have an option to purchase at the end, depending on the lease type.
Upfront Costs	Often requires a down payment (e.g. 10-20% of the price). Also, you might pay loan fees at closing.	Typically minimal upfront cost – usually just the first month’s payment and a security deposit or admin fee. Many leases offer 100% financing of the equipment cost.
Monthly Payments	Loan payments include principal + interest, structured to pay off the full cost of equipment (minus any down payment) over the term.	Lease payments are essentially rental fees. They may be lower than loan payments for the same equipment because you’re not paying toward ownership (especially in an operating lease). However, over a long period, leasing can cost more in total if you continue to lease renewal after renewal.
Maintenance & Other Costs	As the owner, you handle all maintenance, repairs, insurance, etc. You have full responsibility to keep it running (and the lender will expect you to, to preserve collateral value).	Some leases (e.g. certain vehicle or copier leases) can include maintenance or service in the agreement. In many cases, though, you’re responsible for maintenance and insurance during the lease as well. The lease may stipulate you maintain the equipment to certain standards and carry insurance.
Term & Flexibility	Once you take a loan, you’re generally committed to owning the equipment long-term. If you no longer need it, you’d have to sell it (and use the proceeds to pay off any remaining loan). Paying off a loan early may have fees, but you then dispose or keep the equipment as you wish.	Leases can offer more flexibility: you might lease equipment for a shorter period than its full useful life. At the end of the lease, you can return the equipment, renew the lease, or buy the equipment (depending on lease terms). If you only need an item temporarily or expect to upgrade soon, leasing avoids the hassle of selling old equipment. Ending a lease early can incur penalties, but at least at the end of a standard lease term, you have the option to walk away.
Total Cost	If you keep the equipment for many years after the loan is paid, buying tends to be cheaper. You pay the cost of equipment plus interest. After payoff, no more payments, and you might still use the asset for years or sell it to recoup value.	Leasing can sometimes have a lower total cost for short-term uses (you pay for only the time you need). But if you continually lease the same type of equipment back-to-back, the cumulative cost can exceed what buying and maintaining a piece of equipment would have been. Some leases with purchase options (like a $1 buyout lease) effectively end up costing about the same as a loan would, just structured differently.
Balance Sheet Impact	The equipment (asset) and the loan (liability) appear on your balance sheet. You can claim depreciation on the asset and interest expense on the loan. Your debt-to-equity ratio will include the loan.	Historically, operating leases were off-balance-sheet (neither asset nor liability recorded), which was an advantage for some companies. However, new accounting standards (e.g. IFRS 16 and ASC 842 in the U.S.) require most leasing obligations to be recorded on the balance sheet as liabilities with corresponding right-of-use assets. (Short-term leases or very small leases might be exceptions.) Finance leases (capital leases) were always on the balance sheet similarly to loans.
Tax Treatment	You can deduct interest on the loan and claim depreciation on the equipment. In the U.S., you might even deduct most of the cost in the first year under Section 179 or bonus depreciation. This can provide significant tax relief, especially if the equipment is put to use quickly.	Lease payments are generally tax-deductible as a business operating expense (if it’s an operating lease). You cannot depreciate equipment you lease since you don’t own it. For finance leases or lease-purchase contracts, the IRS may treat it as a purchase (meaning you do get to depreciate, and deduct interest part of payments). Often, the tax difference between true leases and loans is mainly in timing of deductions (lease = spread evenly via rent, loan = upfront via depreciation and over time via interest).
Obsolescence	If the equipment becomes outdated, you’re stuck with it unless you sell or upgrade on your own. You bear the risk of technological obsolescence or changes in your needs. That said, once the loan is paid, you could invest in upgrades since you have no more payments.	Leasing shifts the obsolescence risk to the lessor (to a degree). At the end of a lease, you can return outdated equipment and lease a newer model. This is a key reason many businesses lease items like computers or high-tech medical equipment that change rapidly. You pay for the use during the peak of its useful life and then hand it back.
End of Term	When the loan is fully paid, you own the equipment free and clear. You decide when to retire, sell, or upgrade it. If it still has value, you benefit from that value. If it’s fully depreciated and worn out, you dispose of it. The timing is under your control.	At the end of a lease, depending on the type, you typically either return the equipment or purchase it at an agreed price. For a fair market value (FMV) lease, you might have options: return the equipment, buy it at its market value, or extend the lease. For a $1 buyout lease (a type of finance lease), you automatically purchase the equipment for $1 at the end (so you effectively owned it via financing). For a 10% purchase option lease, you can buy it for 10% of original value. If you choose not to buy, you return it and have no further obligation (aside from any wear-and-tear or excess use fees that might apply).

In summary, loans vs. leasing often comes down to a few key considerations:

Do you want to own the equipment long-term? If yes, a loan (or a lease-to-own structure) makes sense. If you only need the equipment for a short period or plan to upgrade frequently, leasing might be better.
What is the total cost over the period you need the equipment? Calculate the total of loan payments (plus down payment) versus total lease payments for the time frame you expect to use the equipment. One may be cheaper than the other.
Cash flow and upfront costs: Loans usually require some money down but then you gain an asset; leasing typically has little upfront cost but you might be making payments indefinitely if you always lease new equipment.
Tax and accounting: Consult with an accountant to see if one option gives a clear advantage for your situation. Sometimes if you can utilize a big Section 179 deduction, buying is attractive. In other cases, if keeping debt off the balance sheet (pre-2019 rules) was important, leasing was used – though as noted, now leases mostly show up on the balance sheet too. Tax treatment can sometimes tilt the decision one way or the other.
Maintenance and usage: If you want full control to modify or heavily use the equipment without worrying about end-of-lease condition, owning is better. If you prefer the idea that you can give it back and not worry about disposing or selling the used equipment, leasing is appealing.

Many companies use a mix: they might buy core long-life assets but lease fast-evolving or secondary equipment. The decision should factor in both the financial analysis and practical considerations of how the equipment fits into your business.

Tips for Choosing the Right Equipment Loan

Selecting the best equipment loan for your needs requires some homework and consideration. Here are some actionable tips and factors to keep in mind when choosing and negotiating an equipment loan:

Assess Your Needs and Equipment Life: Start by evaluating how essential the equipment is to your business and how long you plan to use it. If it’s core to your operations and will serve you for many years, leaning towards purchasing (with a loan) makes sense.

Ensure the loan term doesn’t exceed the equipment’s useful life. On the other hand, if the equipment could become obsolete in a short time or you only need it for a specific project, consider leasing or a shorter-term loan.
Compare Multiple Lenders: Don’t take the first loan offer you receive. Interest rates, fees, and terms can vary widely between lenders. Get quotes from several sources – for example, a traditional bank, an online financing company, maybe an offer from the equipment dealer, and (if eligible) an SBA-backed option.

Compare the annual percentage rate (APR) of each (which includes fees) to truly gauge cost. Even a difference of 1-2% in rate can make a big difference over several years. Also compare conditions like down payment requirements, funding speed, and customer service reputation. Choosing a lender that understands your industry can sometimes smooth the process (they might value the equipment more accurately and offer better terms).
Consider Special Programs: Check if you qualify for any special financing programs. For instance, in the U.S., certain lenders or nonprofits have programs for veterans, minority-owned businesses, or businesses in specific industries. The SBA 7(a) and 504 programs can be excellent for those who qualify, often offering lower down payments or longer terms.

For agricultural equipment, look into Farm Credit cooperatives or USDA programs which might have attractive rates. Manufacturers occasionally offer promotional financing (like 0% interest for a year or deferred payments) – these can be great deals if the timing and equipment align with your needs. Always read the fine print on promotions, though, to know what happens after the promo period.
Mind Your Credit and Financials: Your credit profile and financial statements will heavily influence the loan terms you’re offered. Before applying, it may be worth improving your credit score (if possible) by paying down existing debts or correcting any errors on your credit report.

Similarly, ensure your business financials are in order – lenders will look at your debt-to-income ratios, profitability, and cash flow. If your business is borderline on qualifying, even a small increase in revenue or reduction in expenses (or adding a bit more down payment) could tip the scales.

Sometimes providing additional collateral (if you have other equipment or assets) can also help secure better terms, though that should be done cautiously.
Negotiate Terms: Remember that some aspects of a loan offer might be negotiable, especially if you have good credit or multiple offers. Don’t hesitate to negotiate the interest rate, ask for a longer term or a larger loan amount if you need it, or request the waiver of certain fees.

For example, if one lender offers 8% and another offers 7%, you can show the higher-rate lender the competing offer and see if they can come down. The worst they can say is no – and often they will adjust something to win your business. Even eliminating a one-time fee or a slight rate reduction can save you money.
Understand the Total Cost: Look beyond just the monthly payment. Calculate the total you will pay over the life of the loan (sum of all payments) and weigh that against the value you’ll gain from the equipment.

Sometimes a longer term loan looks attractive due to a low monthly payment, but you might pay a lot more interest in total. Conversely, a short term loan saves interest but could strain your monthly cash flow. Find the right balance. Also be aware of any extra costs like insurance, maintenance, and potential repairs – these aren’t part of the loan, but they are part of the cost of owning equipment.
Check for Prepayment Options: See whether the loan allows you to pay it off early without penalty. If your business grows or you have excess cash, it can be advantageous to clear the debt early and save on interest.

Some loans (especially from banks) have no prepayment penalties, while others (some leases or specialty finance contracts) might charge a fee or not allow it. Ideally, choose a loan with flexibility to prepay, or at least one that has minimal penalties beyond, say, a small administrative fee or interest lockout period.
Consider Down Payment Trade-offs: If you have the cash, making a larger down payment can reduce your monthly payments and total interest. However, if that cash can be better used elsewhere in your business (yielding a higher return than the interest cost of the loan), you might opt for a smaller down payment.

It’s a trade-off. Just be sure you meet the minimum required by the lender. On the flip side, if a lender advertises no down payment, scrutinize the rest of the terms – is the interest rate higher or are there extra fees? Sometimes putting some money down is worth it to get much better terms.
Read the Fine Print: Always read the loan agreement carefully (and have a lawyer review it if it’s a large or critical loan). Pay attention to clauses about default, what exactly the collateral is, and any covenants (requirements you must maintain, like certain insurance or financial ratios).

Check if there’s a confession of judgment clause (some financing agreements have these, which allow the lender to quickly get a judgment against you if you default – try to avoid those). Ensure you understand the process if you were to miss a payment – is there a grace period, a late fee, etc. Being aware of the details will prevent surprises down the road.
Plan for the Worst-Case: While you expect the equipment to generate income, consider a contingency plan in case things don’t go as expected. For example, if the equipment is critical, have backup arrangements (insurance, maintenance contracts, etc.) to avoid prolonged downtime. If your business is seasonal or volatile, maybe look for loans that allow some flexibility in payments.

The SBA disaster loan program, for instance, can sometimes be used if a business is hit by a disaster and can’t pay its debts – that’s an extreme example, but thinking about risk can guide you to choose a lender or loan structure that is more forgiving.
Keep Records: Throughout the loan, keep good records of payments, correspondence, and maintenance of the equipment. This is helpful if any disputes arise or when you need to prove to the lender that you fulfilled all obligations (for example, if they erroneously think you didn’t insure the equipment, you can produce your insurance certificates). Good records also help with tax preparation, as you’ll want to deduct interest and depreciation appropriately.

By taking the time to choose the right loan and structuring it well, you can save money and avoid headaches down the line. The right financing should help your business, not hinder it. When done correctly, an equipment loan is not just a debt – it’s an investment in the growth and capability of your enterprise.

Frequently Asked Questions (FAQs)

Q: What can I purchase with an equipment loan?

A: Equipment loans can be used to buy nearly any type of tangible business equipment. This includes machinery, vehicles, tools, office technology (computers, printers, servers), medical and dental devices, restaurant appliances, farm machinery, construction equipment, manufacturing or processing machinery, and more.

Generally, it should be a physical asset with a useful life that the lender can repossess if needed. Some lenders may have specific exclusions (for example, they might not finance very specialized custom-built equipment that has no resale market), but usually if it’s standard equipment for your industry, it can be financed. Equipment loans are intended for business-use assets, so they are not typically used for personal consumer purchases.

Q: Do I need good credit to get an equipment loan?

A: Credit requirements vary by lender. Traditional banks typically want a good credit score (often in the high 600s or above for small business owners) and solid business financials. SBA loans also require reasonably good credit.

However, there are equipment financing companies that work with fair or even poor credit – they mitigate risk by focusing on the collateral (equipment) and may charge higher interest or require a larger down payment.

In general, having good credit will get you better rates and easier approval. If your credit is not strong, you might still find a loan, but expect to pay more and possibly provide additional guarantees or collateral. It can help to improve your personal and business credit as much as possible before applying.

Q: How much of the equipment cost can I finance?

A: Many lenders will finance around 80% to 100% of the equipment’s purchase price. It’s common for lenders to require the borrower to put 10-20% down. Some lenders, especially those with SBA guarantees or manufacturer promotions, offer 100% financing (meaning no down payment).

The percentage may also depend on whether the equipment is new or used – for used equipment, a lender might finance a bit less of the price to account for depreciation. Always ask the lender what their loan-to-value (LTV) policy is for equipment loans. If you prefer not to make a down payment, you may need to shop around or demonstrate very strong credit and cash flow.

Q: What interest rate can I expect on an equipment loan?

A: The interest rate depends on factors including your creditworthiness, the length of the loan, the age of the equipment, and economic conditions. As of 2025, small business equipment loan rates might range roughly from around 6% annual interest for very qualified borrowers (e.g. established business, strong financials, possibly using an SBA loan) to the low or mid-teens for borrowers with weaker credit or those using alternative lenders.

Extremely risky cases (very poor credit or startups with limited history) might see even higher rates or might be offered a short-term financing which effectively has a high APR. It’s a wide range, so it pays to get quotes. Also, note whether the rate is fixed or variable; most are fixed, especially for loans under 5 years, but if variable, consider that rates may change over time.

Q: How long can I finance equipment for?

A: Loan terms usually align with the type of equipment and its expected useful life. Common terms are 3, 5, or 7 years. Some lenders offer terms up to 10 years for very durable and expensive equipment (and SBA 504 loans even go 10 or 20 years for equipment).

For example, you might get a 7-year term for a piece of heavy machinery, but only a 3-year term for a piece of computer equipment that might be obsolete sooner. The idea is the lender doesn’t want the loan to extend far beyond the time the asset is useful or has value. You, as a borrower, also typically don’t want to be paying for equipment that you’re no longer using.

Q: Is an equipment loan a secured loan? Do I need other collateral?

A: Yes, an equipment loan is typically a secured loan where the security is the equipment itself. In most cases, you do not need to provide additional collateral beyond the equipment being purchased. The lender will place a lien on the equipment, and that gives them the right to seize it if you default.

However, depending on the lender and the deal, there are scenarios where they might also file a blanket lien on your other business assets (common in many bank loans) or ask for personal collateral if the equipment’s value alone is not sufficient.

But as a general rule, the equipment serves as the primary collateral. You will often have to sign a personal guarantee if you are a small business, which isn’t collateral per se, but does make you personally liable.

Q: How is an equipment loan different from a regular business loan or line of credit?

A: An equipment loan is specifically tied to the purchase of an asset (equipment), and that asset serves as collateral for the loan. A regular business term loan might be unsecured or secured by other collateral, and can be used for a variety of purposes (like working capital, marketing, etc.). Lines of credit are usually revolving and meant for short-term needs, not large one-time purchases.

Equipment loans often have fixed rates and terms tailored to the equipment’s life, whereas a line of credit typically has a variable rate and is intended to be paid down and borrowed again. Also, equipment loans might be easier to get for a new business than an unsecured loan because of the collateral.

Q: Can I lease the equipment instead of taking a loan?

A: Yes, leasing is a common alternative to taking an equipment loan. In a lease, you don’t own the equipment (during the lease term), but you pay a rental fee to use it. Leasing often has little or no down payment and can provide flexibility to upgrade or return equipment. We covered a detailed comparison in the Equipment Loans vs. Leasing section above.

In brief, leasing might be better if you want lower upfront costs or you only need the equipment for a limited time (or you want the option to upgrade frequently). A loan is better if you want to own the equipment and potentially keep it for a long time after the loan is paid. It really depends on your circumstances – many businesses actually use a combination of both, financing some equipment with loans and others with leases as it makes sense.

Q: Are the payments tax deductible?

A: With an equipment loan, the interest portion of your payments is tax-deductible as a business expense (just like interest on any business debt). The principal portion is not deductible (since that’s repayment of the loan itself). However, because you purchased the equipment, you can also take depreciation deductions on the equipment.

In many cases, you can accelerate depreciation (for example, using bonus depreciation or Section 179 to write off a lot of the cost in the first year). This means you effectively get a tax benefit from the equipment cost itself as well, separate from the interest deduction.

If you lease equipment, by contrast, your entire lease payment can usually be deducted as a business expense, but you don’t depreciate the asset. Over the long run, the tax outcome often ends up similar, but the timing of deductions differs. Always consult your accountant to optimize tax treatment, especially if the equipment is a large purchase.

Q: What happens if I no longer need the equipment or want to sell it before the loan is paid off?

A: If you want to sell equipment that still has a loan on it, you’ll need to satisfy the lender’s lien. Typically, this means you must pay off the remaining loan balance (often from the sale proceeds) before the buyer can get clear title to the equipment. In practice, the steps would be: obtain a payoff quote from your lender for the current balance, sell the equipment (either to a third party or sometimes back to a dealer), and use the sale funds to pay the lender.

The lender then releases the lien, allowing the transfer to the new owner. If the equipment’s sale price is higher than what you owe, you keep the difference. If it’s less, you’d have to pay the remaining difference out of pocket to clear the loan. Coordinate with your lender, as they may have specific procedures for handling a sale (sometimes they’ll work directly with the buyer on payoff).

Another scenario: if you simply no longer need the equipment but can’t find a buyer immediately, talk to the lender – sometimes they might allow a voluntary surrender of the equipment to satisfy the loan. However, they will sell it at auction, and if the auction doesn’t cover the balance, you could still be on the hook. It’s usually better for you to find the best sale price you can rather than defaulting.

Q: What if I default on an equipment loan?

A: Defaulting on an equipment loan is serious. If you miss payments and do not cure the default within any grace period, the lender can repossess the equipment. They will typically send someone to collect it (or disable it, in the case of some high-tech financed equipment that can be remotely shut off). After repossession, the lender will sell the equipment, often at auction, to recover what they can.

If the sale price doesn’t cover the loan balance and costs, you are usually liable for the deficiency (the remaining amount). The lender could take legal action to collect that. Additionally, your business credit and possibly personal credit (if you gave a personal guarantee) will be severely impacted. You may also lose any future claim to depreciation or other tax benefits for that equipment once it’s taken back.

In short, default can lead to losing the equipment, being pursued for remaining debt, and long-term credit trouble. If you think you’re at risk of default, it’s best to proactively talk to the lender; occasionally they might restructure the loan or offer a short deferment if you can demonstrate a plan to get back on track.

Q: Can I get an equipment loan if my business is a startup (or less than a year old)?

A: It’s challenging but not impossible. Traditional banks and many lenders prefer at least a couple of years in business. However, some equipment financing companies cater to newer businesses if the owner has good personal credit and the equipment has strong collateral value.

You will almost certainly need to provide a personal guarantee, and possibly a larger down payment to offset risk. The SBA 7(a) loan program is an avenue for startups if you have a solid business plan, since SBA loans can be used by startups (though they still want to see some industry experience and good credit). Another option is seller financing or manufacturers’ financing, which sometimes are more lenient if they really want to sell their equipment.

It might also help to start with a smaller loan to establish some credit history for your business, then later finance bigger equipment. Be prepared to document your revenue projections and how the equipment will generate income. The lender essentially needs to be convinced that your new business will be able to make the payments – strong personal finances or collateral help make that case for a startup.

Conclusion

Equipment loans are a vital financing tool that empower businesses of all sizes, professionals, and farmers to acquire the machinery and tools they need without paying the full cost upfront. By understanding how these loans work – from the basic mechanics to the application process and terms – you can make informed decisions that balance the benefits and costs. Remember that an equipment loan is not just an expense; when used wisely, it’s an investment in your business’s productivity and growth.

In summary, equipment loans use the purchased equipment as collateral, allowing borrowers to spread payments over the asset’s useful life. This preserves cash for other needs while immediately equipping the business for operation or expansion.

We’ve discussed various types of equipment financing (from bank loans to SBA programs to vendor financing) and noted that who can benefit ranges from the smallest startups to large corporations and agricultural enterprises.

Key features like interest rates, down payments, loan terms, and tax implications were covered – highlighting that interest rates in the mid-2020s have risen from prior lows, and that businesses should take advantage of tax deductions like depreciation to soften the cost of financing.

We also weighed the pros (like cash flow management and ownership equity) against the cons (like interest costs and debt risk), and compared loans to leasing as alternative paths. Real-world examples illustrated how businesses use equipment loans to grow, and the FAQ tackled common concerns such as credit requirements, financing percentages, and what happens if things go wrong.