Equipment Financing
Options for Small Businesses

Many small businesses need reliable equipment to operate, grow, and stay competitive—whether it’s delivery trucks, manufacturing machinery, office computers, or construction tools. But buying this equipment outright can be a real challenge, especially if your business has limited savings or inconsistent income.

Equipment financing offers a practical way around this problem. Instead of paying for everything at once, you can get the equipment now and pay for it gradually, often through fixed monthly payments. This approach helps you manage cash flow, so you can invest in your business’s growth without having to save up for years.

What Is Equipment Financing?

Equipment financing is a type of business funding designed for buying or leasing physical equipment. The main idea is simple: instead of paying the full cost up front, you borrow the money or lease the equipment, then pay it off over time.

Unlike general business loans, equipment financing is linked directly to the equipment you’re buying. The equipment itself acts as collateral, meaning that if you can’t make your payments, the lender can take back the equipment. Because the lender has this security, equipment financing is often easier to get, even if your business wouldn’t qualify for a standard loan.

This type of financing is often used for things like:

• Construction and heavy machinery
• Manufacturing tools
• Commercial vehicles
• Medical or dental equipment
• Restaurant kitchen equipment
• Technology and office electronics

Most equipment loans or leases match the expected lifespan of the equipment, usually 3 to 7 years. That way, your payments remain reasonable and reflect the value you’re getting as you use the equipment.

How Equipment Financing Works

Getting equipment financing is usually a straightforward process:

1. Choose the equipment you need—whether to buy or lease.
2. Apply for financing through a lender, leasing company, or online platform.
3. The lender pays the vendor directly, so you receive the equipment.
4. You make fixed payments over a set term (often monthly).
5. At the end of the term, you may own the equipment, return it, or renew the lease, as specified in your agreement.

If you take out a loan, you own the equipment right away, but the lender files a UCC-1 lien (a public claim) on it. If you default, the lender can repossess it.

If you lease, the lender or leasing company keeps ownership. You rent the equipment for a set period, and at the end, you have the option to buy it for a small fee or simply return it.

Equipment financing is often more accessible and flexible than traditional business credit, and it can come with tax benefits, especially if you use Section 179 of the IRS code, which lets you deduct the full equipment cost in the year you start using it.

Types of Equipment Financing Options

There are several ways to finance equipment. The best choice depends on your business size, credit, cash flow, and the type of equipment you need.

1. Bank or Credit Union Equipment Loans

These loans are a familiar and trusted option. They typically cover 70% to 100% of the equipment price, and you pay the rest as a down payment.

• Good credit can get you interest rates starting around 6.5% APR.
• Repayment terms usually range from 3 to 7 years.
• The equipment serves as collateral, and the lender files a lien.
• Origination fees may apply, often 1% to 3% of the loan amount.

This route is ideal if your business is more established (over a year old), with steady revenue and a credit score of at least 680. A benefit: the equipment appears on your balance sheet, which can make your company look stronger to investors or partners.

2. SBA-Backed Loans (7(a), 504, and Microloans)

If you don’t qualify for a regular bank loan—maybe your business is new or your down payment is small—an SBA loan might help. The SBA (Small Business Administration) doesn’t lend directly. Instead, it guarantees part of your loan, making lenders more willing to approve you and offer better terms.

• SBA 7(a) Loans: For general business use, including equipment. Borrow up to $5 million, finance up to 90% of the cost, and repay over up to 10 years.
• SBA 504 Loans: For larger or long-term purchases, often with two lenders (a bank and a CDC). Repayment can be up to 25 years.
• SBA Microloans: For smaller needs (up to $50,000), especially good for startups. Terms are up to 6 years, with interest rates typically between 8% and 13%, and less paperwork.

You can apply through SBA-approved lenders or on the SBA website.

3. Equipment Leasing (Finance and Operating Leases)

Leasing is smart if you don’t want to buy equipment outright or if it quickly becomes outdated. You pay to use the equipment instead of owning it.

• Finance (Capital) Lease: Works like a loan. You make regular payments, and usually own the equipment at the end for a small buyout price. You can deduct equipment depreciation and interest.
• Operating Lease: This is a short-term rental. At the end, you return or renew the lease. You don’t own the equipment, and all payments count as operating expenses. This is ideal for things that lose value fast (like computers or vehicles).

Leasing can cover the full cost of the equipment (including delivery and installation) and may not require a down payment. Some companies even offer same-day approval.

4. Vendor or Manufacturer “0%” Programs

Some equipment sellers run special promotions like “0% financing for 12 months.” These are set up at the dealership or showroom and may have more flexible credit requirements, plus perks like deferred payments or free maintenance.

However, always read the fine print. Sometimes, a higher price or strict terms hide behind the “0%” offer. Check for penalties or time limits.

This option is common for medical, printing, commercial vehicles, and office equipment. If you calculate the total cost and check the contract, you can find some real savings.

5. Sale-Leaseback

If you already own equipment and need cash fast, you can sell it to a finance company and lease it back. This way, you get the funds but keep using your equipment.

• This frees up capital
• Lets you keep working with your current equipment
• Payments are often tax-deductible
• Your other credit lines stay unaffected

Lenders are more likely to approve this if the equipment is in good shape and you have paperwork to prove its value.

6. Government and Green-Energy Programs

Federal and state programs offer support for businesses investing in green technology or clean manufacturing. These often come in the form of low-interest loans, rebates, or even grants.

Examples:

• USDA REAP Grants: For rural businesses buying renewable energy systems.
• Rural Utility Service Loans: For broadband, water, and energy in rural areas.
• State Clean-Energy Incentives: For electric vehicles, solar equipment, and more.

These can often be used together with federal tax advantage breaks like Section 179 deductions.

7. Crowdfunding and Revenue-Based Financing

If you’re in tech, consumer products, or hardware, you might raise funds without a loan.

• Crowdfunding: Platforms like Kickstarter or Indiegogo let you raise money from supporters, often by pre-selling products.
• Revenue-based financing: You get money now in exchange for a share of your future monthly revenue (instead of fixed loan payments).

These options don’t require collateral or a high credit score, but you do need a strong story, marketing plan, and audience.

Eligibility Criteria for Small Businesses

Before you apply for business equipment financing, it helps to know what lenders look for. While exact requirements vary, here’s what’s usually expected:

Time in Business

Traditional lenders prefer companies that have been operating for at least 1–2 years. This shows stability. Some online lenders and leasing companies will work with newer businesses, but may charge higher rates or need more paperwork.

Business and Personal Credit

Most lenders check both your business and personal credit scores.

• For bank or SBA loans, a personal score of 680+ is typical.
• Some online lenders accept scores as low as 600, but with higher rates.

Lenders also review your credit history for bankruptcies or defaults.

Revenue and Cash Flow

Lenders need to see that your business brings in enough money to make the loan payments. They’ll usually ask for:

• Revenue statements (annual or monthly)
• Recent bank statements
• Profit and loss (P&L) statements

Some lenders have minimum revenue requirements, often ranging from $100,000 to $250,000 per year. Online lenders may be more flexible, but their terms may not be as favorable.

Down Payment or Collateral

Some options require a down payment, often 10%–30% of the equipment cost. If you want 100% financing, leasing or SBA loans might be a better option, but the equipment will always serve as collateral.

Some lenders may also ask for extra collateral or a personal guarantee (meaning you’re personally responsible if the business can’t pay).

Equipment Type and Condition

Lenders prefer equipment that’s essential to your operations, has good resale value, and is easily verifiable with invoices or serial numbers. Used equipment can sometimes be financed, but it might require an appraisal.

Required Documents

To speed things up, prepare these documents:

• Government-issued ID and business license
• Recent business bank statements
• Financial statements (P&L, balance sheet)
• Recent business tax returns
• Equipment invoice or vendor quote
• Lease or ownership documents (if refinancing)

For larger loans or new businesses, you may also need a business plan.

How to Apply for Equipment Financing

Applying for equipment financing is straightforward if you’re organized:

Step 1: Define What You Need

Determine the exact equipment, including brand, model, and price. Get a quote or invoice from the vendor.

Step 2: Check Your Credit and Eligibility

Know your credit scores and key business details (time in business, revenue, debts). This helps you target lenders that fit your situation.

Step 3: Compare Lenders and Loan Types

Look at interest rates, loan or lease terms, fees, approval times, and document requirements.
Banks may offer better rates, but online lenders are usually faster.

Step 4: Submit Application and Wait for Approval

Submit your documents and wait for a decision.

• Online lenders: 1–3 days
• Traditional banks: 5–10 days
• SBA loans: up to 30 days

Step 5: Review Terms and Finalize

Read the contract carefully. Check interest rate, payments, total costs, fees, and any buyout or guarantee requirements. If you agree, sign and receive the funds or equipment.

Factors to Consider Before Choosing a Financing Option

Not all options work the same. Think about these factors before deciding:

Equipment Lifespan and Value

If the equipment will last many years (like industrial machines), a loan or finance lease could be best. For things that go out of date quickly, an operating lease may be smarter.

Interest Rates and Total Costs

Always look at the full cost over the life of the loan, not just the monthly payment. Check the APR (which includes fees) and see if there are prepayment penalties.

Ownership and Tax Effects

Do you want to own the equipment eventually? If yes, pick a loan or finance lease. If not, operating leases offer flexibility. Ask your accountant about Section 179 and other tax benefits.

Flexibility and Risk

If your income fluctuates seasonally, long-term debt may be a risk. Shorter leases or lines of credit can give you more flexibility. Read all terms—some leases have restrictions or require certain repairs.

Conclusion

Equipment financing enables small businesses to grow, compete, and stay current with new technology, all without compromising their financial stability. Whether you’re buying machinery, upgrading your office, or adopting green practices, the right financing approach can help your business move forward.

A key question for many business owners is the classic “lease vs. buy” decision. Buying equipment often makes sense if you want long-term ownership, potential tax benefits, and the chance to build value on your balance sheet. On the other hand, leasing may be a better choice if you need flexibility, want to avoid large upfront costs, or anticipate that your equipment will become outdated quickly. Weighing the pros and cons of lease vs. buy based on your business needs, budget, and growth plans is an important step.

Ultimately, equipment financing—whether you choose to lease or purchase—can provide your business with the resources it needs to thrive and adapt in a changing market. Take the time to explore your options and make a decision that best fits your goals.