What is equipment financing?

Reviewed by Turan Zeynal, Managing Partner, Outset Funding Partners · Last reviewed July 17, 2026

TL;DR

Equipment financing is a loan or lease used to purchase business equipment — vehicles, machinery, IT hardware, medical devices — where the equipment itself serves as the primary collateral. Because the lender can repossess the equipment on default, approval is easier and terms are longer than a standard business loan. Typical terms run 24–84 months and match the equipment's useful life.

Quick facts

Typical amount: $5,000 – $5,000,000
APR range: 6% – 30%
Term length: 24 – 84 months
Down payment: 0 – 25%
Speed: 1 – 7 days typically
Minimum credit: 580+ typical, 620+ for best rates
Time in business: 6+ months typical, some accept startups
Collateral: The equipment itself

The 60-second answer

Equipment financing is one of the easier forms of business funding to qualify for, because the lender's risk is anchored to a tangible asset. If you stop paying, the lender can repossess and resell the equipment — which is why they can accept lower credit scores, less time in business, and offer longer terms than an unsecured loan.

The two main structures are equipment loans (you own the equipment, financed with a term loan) and equipment leases (the lender or leasing company owns the equipment and rents it to you, often with a purchase option at the end). Which one is better depends on how long you'll use the equipment, how fast the technology ages, and your tax strategy.

How it works, step by step

Get an equipment quote
Vendor invoice or purchase order for the exact equipment. Lenders need to see the specific item, cost, and vendor.
Apply with the equipment as collateral
Application, ID, EIN, 3–6 months bank statements, and the equipment quote. Lenders may also want last year's tax return for larger amounts.
Approval and offer
Approval typically 1–3 days. Offer includes amount, APR, term, down payment, and residual (for leases).
Vendor payment
The lender pays the vendor directly. You take delivery of the equipment and start using it.
Monthly payments
Fixed monthly payments over the term. At the end: you own it (loan) or you decide to buy, return, or refinance (lease).

Why equipment financing is often the cheapest capital available

Equipment financing is one of the few small business products where the collateral is the loan. The lender holds a first lien on the equipment you're buying, and if you default, they repossess and resell it. That structure lets equipment finance companies price risk lower than an unsecured working capital loan — because the loss given default is smaller. In practice, this means equipment finance approvals happen with weaker credit and higher LTVs than owners expect, especially for titled assets (trucks, trailers, medical imaging) or highly liquid resale categories (restaurant equipment, forklifts, construction hand equipment).

The trap: financing at 100% of the invoice, adding warranty and delivery inside the loan, and stretching the term past the productive life of the asset. If you finance a five-year forklift over seven years with no down payment, you'll be upside down for most of the term and locked into monthly payments on a machine that's already breaking down. A cleaner rule — put 10–20% down, match the term to 70–80% of the asset's useful life, and finance only the invoice price of the equipment itself.

Also worth knowing: Section 179 lets most businesses deduct the full purchase price of qualifying equipment in year one, even when it's financed. That's a real cash tax benefit that changes the true cost of ownership by 15–30% depending on your bracket.

Pros and cons

Pros

✓Easier to qualify — equipment is collateral
✓Longer terms match equipment useful life
✓Preserves cash and existing credit lines
✓Section 179 tax deduction available for eligible equipment
✓Startups and bad-credit borrowers have real options

Cons

×Higher rates than SBA or bank term loans
×Down payment usually required (0–25%)
×Equipment can be repossessed on default
×Leased equipment isn't owned — no equity build-up
×Some contracts have UCC filings that limit other borrowing

Who qualifies

•US-based business, 6+ months (some lenders accept startups)
•$100,000+ annual revenue for most lenders
•580+ personal FICO (620+ for best rates)
•Active US business bank account
•Equipment that has resale value (used, titled, or serialized helps)
•No active bankruptcy

Equipment loan vs lease

Option	When to use	Watch out for
Equipment loan	You'll use the equipment 5+ years and want to own	Full down payment and monthly payments
Capital lease ($1 buyout)	You want ownership but no down payment	Higher total cost than a loan
Operating lease (FMV buyout)	Tech ages fast — you'll upgrade in 3–5 years	No equity build-up; buyout at market value if you keep it
SBA 7(a) or 504	Large purchase (>$150K) and you can wait 45–90 days	Slow; heavy documentation

Frequently asked questions

How is equipment financing different from a business loan?

A standard business loan is unsecured or secured by broad business assets; equipment financing is secured specifically by the equipment being purchased. This narrower collateral makes underwriting easier and terms longer, but the lender can repossess only the equipment (not other assets) on default.

Can I finance used equipment?

Yes — most equipment lenders finance used equipment, especially if it's titled (trucks, trailers) or serialized (industrial machinery). Terms may be shorter for older equipment (a lender won't offer an 84-month term on 10-year-old equipment).

Do I need a down payment?

It depends on credit and the equipment. Strong credit and new equipment can get 0% down. Bad credit or specialty/used equipment often requires 15–25% down.

What's Section 179?

Section 179 of the IRS code lets businesses deduct the full purchase price of qualifying equipment in the year it's placed in service, up to an annual limit ($1.16M for 2023, adjusts yearly). This makes equipment financing especially tax-efficient. Confirm eligibility with your CPA.

What happens if I default?

The lender repossesses the equipment, sells it, and applies the proceeds to your balance. If the sale doesn't cover what you owe, you owe the deficiency (and it can go to collections and personal credit if you signed a personal guarantee).

Can I refinance equipment financing?

Yes — this is common when a business improves credit and wants a lower rate, or when they want to free up cash by extending the term. Prepayment penalties on the original loan can affect the math.

Sources

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