Understanding Interest Rates and Terms in Equipment Financing

Access to modern equipment is essential for small businesses, but buying machinery or technology outright can strain capital. Equipment financing (through loans or leases) lets firms spread payments over time, preserving cash for operations.

This helps businesses grow without a huge upfront cost. In this guide we explain how interest rates and terms work in U.S. equipment loans and leases, and compare financing from banks, online lenders, and equipment vendors.

Equipment Loans

An equipment loan is a business loan used to purchase equipment. The lender typically takes the equipment as collateral (they can repossess it if you default). Loans usually cover 80–100% of the purchase price, so you often pay 10–20% upfront as a down payment.

You then repay the loan (with interest) over a fixed term. Once the loan is fully paid, you own the equipment outright.

Interest Rates: Typically range from about 4% up to 25% APR, depending on credit and terms. (Good credit (700+) often means rates near 4–10%; lower scores pay more.)
Term Length: Commonly 3–10 years. (Bankrate notes equipment loans often have terms up to 10 years.)
Down Payment: Often 10–20% of cost. More down means lower interest.
Ownership: You own the equipment after the final payment. You can sell or reuse it as you wish.
Tax Benefits: Interest on the loan is usually tax-deductible, and you can claim depreciation or a Section 179 expense for qualifying equipment. (For example, loans can allow you to write off equipment under IRS rules.)

Equipment loans suit businesses that need long-term use of equipment. As one guide notes, “Loans are better suited for businesses looking to own equipment long-term”. Pros include building equity in the asset and full ownership, but cons include higher monthly payments and the risk of obsolescence as equipment ages.

Equipment Leasing

In an equipment lease, you essentially rent the equipment for a fixed term instead of buying it upfront. You make regular payments for the lease period, typically 2–5 years, with little or no down payment.

At lease end you either return the equipment or buy it (often for a nominal amount or with a balloon payment). Leases are common when businesses prefer lower monthly costs or expect to upgrade technology frequently.

Monthly Payment: Lower than a loan for the same equipment, since you’re paying for its use rather than full ownership. Typical lease terms are shorter (e.g. 24–60 months).
Ownership: The lessor (leasing company) owns the equipment during the lease. You may have an option to purchase at the end (e.g. with a final “balloon” payment) in a capital (finance) lease. An operating lease usually has no buyout – you simply return the gear when done.
Maintenance: Many leases include maintenance or service in the agreement. (With a loan, you are responsible for repairs and upkeep, whereas a lease can bundle those costs.)
Tax Treatment: Lease payments are generally treated as a business expense and often fully deductible (especially for operating leases). (Note: this means you deduct the lease payment, but you do not claim depreciation since you don’t own the asset.)
Typical Terms: Dealers may charge fees or high interest hidden in the lease. Bankrate warns that leases often cost more overall (even with lower monthly payments) because you don’t build equity.

Leasing is best for short-term needs or equipment that quickly becomes obsolete. It offers flexibility and low upfront cost, but at the end you don’t own the equipment (unless you pay the buyout).

Pros include easy upgrading to newer models; cons include potentially higher APRs and no depreciation tax deductions.

Feature	Equipment Loan	Equipment Lease
Payments	Higher monthly payments over longer terms (e.g. 5–10 years)	Lower monthly payments over shorter terms (e.g. 2–5 years)
APR	Generally lower (e.g. roughly 4–34% APR, depending on credit)	Often higher in practice; many leases don’t quote an APR (lease payments can embed extra costs)
Ownership	You own the equipment after the loan is paid	Lessor owns the equipment; you can buy at lease-end if you choose (balloon or $1 buyout)
Down Payment	Commonly requires ~10–20% upfront	Little or no down payment (sometimes a first/last payment)
Tax Treatment	Interest is deductible; qualify for depreciation or Section 179 deduction	Lease payments typically fully deductible as a business expense
Best Use	Long-term ownership and use	Short-term use or frequent upgrades, conserving cash

Interest Rates in Equipment Financing

Interest rates determine the extra cost of financing. In equipment loans or leases, even a small difference in APR can greatly affect your total expense. Rates are quoted as an annual percentage (APR).

Fixed rates stay the same throughout the term; variable rates can float with market benchmarks (like the prime rate). Fixed rates give predictability; variable rates can drop if market rates fall, but they also risk rising payments.

Typical equipment loan rates vary with credit and lender. Crestmont Capital reports equipment financing APRs roughly 4–25% for most small businesses. Bankrate shows similar ranges (about 4–34% APR, depending on credit quality).

For example, SBA-backed equipment loans often carry mid-single-digit rates (currently around 6–8% fixed for strong borrowers), while unguaranteed term loans or leases can be in the teens.

According to federal surveys, small businesses applying to online lenders often cite “high interest rates” as a major concern, reflecting that online lenders typically charge more than traditional banks.

The chart above illustrates typical interest rate ranges for small-business loans by lender type in 2025. Banks and SBA loans (blue) have rates in the mid-single digits, while alternative/online lender rates (orange) are much higher. Always compare costs carefully: a low monthly payment can mask a higher total cost.

Several factors affect your actual rate:

Credit Score and History: Strong business (and personal) credit scores earn lower rates. The table below (Crestmont Capital) shows top-tier credit (700+) landing around 4–10%, whereas scores in the 600s see 8–18%, and poor credit 15–25% or more.
Loan Term: Shorter terms typically have lower APRs (because the lender’s risk period is shorter). Longer terms spread payments out but usually cost more interest overall.
Equipment Collateral: Loans secured by equipment that holds value may qualify for better rates. For instance, financing a new truck may be cheaper than a fully depreciated used copier.
Down Payment: A larger down payment reduces lender risk and can earn a lower rate. Some lenders offer advance-payment financing discounts.
Lender Type: Banks and credit unions generally have the lowest rates but strict underwriting. Online lenders and alternative financiers move faster on approvals but charge higher APRs. For example, Clarify Capital notes “online lenders typically charge higher rates than banks”.

Always check whether the rate is fixed or variable, and whether there are any extra fees. And remember: the total cost matters most. As Crestmont cautions, “a low monthly payment might seem appealing—but high interest rates could mean you’re paying far more over the life of the loan”. Calculate the full repayment amount before deciding.

Comparing Financing Providers

Small businesses have several financing sources: banks/credit unions, online lenders, and equipment vendors (manufacturer finance). Each works differently:

Banks & Credit Unions: Traditional lenders usually offer the lowest interest rates, especially if you have a strong financial profile. However, they require substantial documentation (two-plus years in business, solid revenue – often ~$100K/year – and good credit).

Approval can take weeks. Collateral (like the equipment or real estate) is typically needed, and a down payment (~10–20%) is common. In return, you get longer loan terms and lower APRs (often mid-single digits). Established businesses often use banks for large, long-term purchases (for example, SBA 7(a) loans up to $5M).
Online/Alternative Lenders: These fintech or nonbank lenders (e.g. OnDeck, BlueVine, etc.) underwrite quickly using technology. They can approve equipment loans in days, sometimes with minimal paperwork.

They are more flexible on credit (many accept scores down to ~600) and business age, so startups or “challenged” borrowers often turn here. The trade-off is cost: online lenders charge higher APRs – often in the high teens or higher – because they take more risk.

According to a Fed survey, entrepreneurs using online lenders cite “high interest rates” and “unfavorable terms” as their biggest complaints. In short, online finance is fast and convenient, but costlier.
Equipment Vendor (Captive) Financing: Many equipment manufacturers or dealers have in-house leasing companies (e.g. John Deere Financial, Caterpillar Financial).

Vendor financing can offer special deals on new equipment – for example, 0% promotions or cash-back incentives. It’s very convenient (often arranged on the spot at purchase) and may require little cash upfront.

However, vendor finance often means higher costs for used or specialized gear. BDC reports that “vendor finance companies will typically charge higher interest rates and finance a lower percentage of the cost of used equipment”.

Also, vendors tend to offer shorter-term leases or loans. In summary, vendor financing can be attractive for brand-new equipment and fast approvals, but be wary of potentially higher APRs and limited loan-to-value for non-new gear.

Compare these options before deciding. As the SBA advises, “don’t assume you’ll get the best terms from your bank or [the] equipment manufacturer’s captive finance company” – shop around to compare rates, terms, and fees.

Key Terms to Know

APR (Annual Percentage Rate): The total yearly cost of financing (interest + fees). Always compare APRs, not just monthly payments.
Amortization: The schedule of principal vs interest in each payment. Shorter amortization = higher payments but less interest overall.
Balloon Payment: A large final payment due at lease-end (common in capital leases) that buys the asset from the lessor.
Residual Value: The estimated value of equipment at lease-end. Often determines buyout price in a lease.
Fair Market Value (FMV) Lease vs $1 Purchase Option: An FMV lease has lower payments and no buyout obligation, but you never own the equipment. A $1 (or minimal) lease has higher payments but lets you own it at term’s end (and claim depreciation).
Section 179 Deduction: A U.S. tax code rule that allows many businesses to deduct the full cost of equipment purchases in the year bought. Only available if you own the equipment (as with loans or certain leases).
Depreciation: Non-cash tax write-off for owning equipment. Available only when you own (loan) or do a buyout, not when simply leasing.

Understanding these terms will help you negotiate better terms and plan for the true cost of financing.

Loan vs. Lease: Which Is Best?

The choice between loan and lease depends on your needs. If you plan to use equipment for many years, a loan often makes more sense: you build equity and ultimately own the asset. Loans also let you deduct depreciation and Section 179, which can offset costs.

On the other hand, if you want flexibility and lower monthly payments, a lease may fit. Leases suit equipment that becomes obsolete quickly (like computers or trucks replaced often) or when cash is tight. Keep in mind, however, that leases typically cost more overall.

As noted earlier, a very low lease payment can hide a higher total cost of financing. Compare the total cost (including interest, fees, tax effects) for both options. In general: loans are best for long-term ownership and maximum tax deductions; leases are best for short-term use and cash conservation.

Frequently Asked Questions

Q: What affects my equipment financing interest rate?

A: Lenders consider your business and personal credit scores, time in business, revenue, down payment, and the equipment’s value.

Strong credit and a large down payment lower rates. Collateral (equipment that holds value) also helps. Banks typically quote better rates than alternative lenders, reflecting lower risk.

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

A: Rates vary. Creditworthy borrowers can see mid-single-digit APRs (bank loans around 6–8% is common). Lesser credit or unsecured loans run higher (often 10–25%).

Crestmont Capital notes typical equipment loan APRs from about 4% up to 25% depending on credit. SBA-backed loans for equipment may be capped around 10–14%, while fast online lenders can quote rates well into the high teens.

Q: What credit score do I need for equipment financing?

A: Minimum requirements vary. Many lenders want at least a 600–650 personal credit score and solid business credit. However, the best rates go to 700+ scores.

According to industry data, borrowers with 700+ credit often get roughly 4–10% APR, whereas 600–699 scores see 8–18%, and below 600 can pay 15–25% or more. You can still sometimes get financing with weaker credit through alternative lenders, but expect higher costs.

Q: Should I get a loan from a bank, an online lender, or through the equipment dealer?

A: It depends on your priorities. Banks (or credit unions) usually offer the lowest rates and can finance used equipment well, but they require more paperwork, collateral, and time in business.

Online lenders approve fast with minimal docs, which is great if you need cash quickly or lack history, but their rates are higher. Vendor financing often gives the easiest and quickest approval on new equipment, sometimes with promotional rates (even 0% offers).

However, vendor deals are usually for new gear only; financing used or out-of-line equipment from a dealer often costs more. The best approach is to compare quotes: a bank might give you a cheaper rate, but an online or vendor lender might approve a loan you can’t get elsewhere.

Q: What is the difference between an operating lease and a capital lease?

A: An operating lease is like renting; you pay to use the equipment and return it at term’s end. You never own the equipment, so your payments can be fully deducted as rent expense.

A capital (finance) lease is more like a loan: you make payments and usually have an option to buy the equipment at the end (often for $1 or its fair market value). Capital leases let you (in effect) own and depreciate the equipment, while operating leases do not.

Q: Can I deduct my equipment financing on taxes?

A: Yes. If you take a loan to buy equipment, you can generally deduct the interest and also depreciate the equipment or use Section 179 to expense it.

If you lease equipment, your lease payments are usually fully deductible as a business expense. (Tax rules are complex, so it’s wise to consult a tax advisor.)

Q: How do I get the best interest rate on equipment financing?

A: Improve your business credit score, provide solid financial documents, and shop around among different lenders. Crestmont recommends boosting credit, offering collateral or a down payment, and getting quotes from multiple lenders.

Often, tightening the loan term (if affordable) can also lower the APR. Remember, an interest rate is negotiable – compare banks, online lenders, and vendor programs to find the most affordable deal.

Conclusion

Financing equipment is often essential for small businesses, but interest rates and contract terms vary widely. Before choosing, shop around: banks, credit unions, SBA lenders, online lenders, and vendor financiers all offer equipment loans or leases with different trade-offs.

Consider your cash flow, the equipment’s expected life, and how quickly you need funding. Always focus on the total cost of the deal – interest rate, fees, down payment, and tax implications – not just the monthly payment.

By understanding rates and terms (and comparing offers), you can pick the option that best fits your budget and helps grow your business over time.