Equipment financing vs term loan: which one saves you more?
Reviewed by Turan Zeynal, Managing Partner, Outset Funding Partners ·
Equipment financing uses the equipment itself as collateral, which usually means lower rates (6–20% APR), higher approval odds, and looser credit requirements than a general-purpose term loan. Use equipment financing for any titled asset (vehicles, machinery, medical, restaurant). Use a term loan for general capital, mixed uses, or soft costs.
Quick facts
- Equipment cost
- 6% – 20% APR
- Term loan cost
- 8% – 30% APR
- Equipment speed
- 2 – 10 days
- Term loan speed
- 1 – 4 weeks
- Equipment credit
- 600+ typical
- Term loan credit
- 660+ typical
- Equipment term
- Match to asset life
- Term loan term
- 1 – 10 years
The 60-second answer
The choice is usually decided by what you're actually buying. If you can put a serial number on it — a vehicle, a piece of machinery, a commercial oven, a dental chair, an excavator — equipment financing is almost always the better product. The equipment itself is the collateral, which lowers lender risk and usually results in a lower rate and easier qualification than an unsecured term loan.
A term loan is the right choice when the money is going toward multiple things at once (equipment plus working capital plus renovation), when you need cash for something without a title (marketing, hiring, inventory), or when you already have the equipment paid for and want general operating capital.
Pros and cons
- ✓Equipment financing typically has lower rates than an unsecured term loan
- ✓Equipment financing is easier to qualify for — asset secures the deal
- ✓Equipment financing offers Section 179 and bonus depreciation tax benefits
- ✓Term loan can fund any business need, not just equipment
- ✓Term loan doesn't tie up the specific asset as collateral
- ×Equipment financing only works for the specific asset — no general capital
- ×Equipment financing may require a down payment (0–20%)
- ×Equipment financing ties the asset up — hard to sell or replace early
- ×Term loan is usually more expensive for the same borrower profile
- ×Term loan approval is harder — credit and financials drive the decision
Side-by-side
| Option | When to use | Watch out for |
|---|---|---|
| Collateral | Equipment: the asset itself | Term loan: sometimes required, often unsecured |
| Cost | Equipment: usually lower | Term loan: usually higher for same profile |
| Approval | Equipment: easier — asset-backed | Term loan: harder — credit-driven |
| Use of funds | Equipment: only for the asset | Term loan: any business purpose |
| Term length | Equipment: matches useful life | Term loan: flexible 1–10 years |
| Down payment | Equipment: 0–20% typical | Term loan: none, but stricter underwriting |
| Tax treatment | Equipment: Section 179 / bonus depreciation | Term loan: interest deductible only |
Frequently asked questions
Which is cheaper — equipment financing or a term loan?
For the same borrower profile, equipment financing is almost always cheaper because the equipment is collateral. A $150,000 excavator loan might come in at 9% APR, while an unsecured term loan for the same borrower might be 15–20%.
Can I get equipment financing with bad credit?
Yes — equipment financing is one of the more forgiving products. Because the asset can be repossessed, lenders can approve down to 600 FICO (sometimes 580 with a bigger down payment) even when term loan lenders would decline.
What counts as 'equipment'?
Any titled or serial-numbered business asset: vehicles, trucks, trailers, construction machinery, medical/dental equipment, restaurant equipment, manufacturing machinery, IT hardware, and often software packages.
Can I finance used equipment?
Yes, and most equipment lenders actively fund used equipment purchases — including dealer, auction, and private-party sales. Rates are usually 1–3 points higher than new equipment for the same borrower.
What if I need money for the equipment AND working capital?
Use both: equipment financing for the asset, a term loan or line of credit for the working capital. Mixing the two into one general-purpose loan typically means paying the term loan rate on both — usually a more expensive mistake.
Sources
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