When a business needs a delivery van, a commercial oven or a new server rack, it can finance that item directly or borrow a general term loan and buy it outright. The right choice depends on what else the project needs and how the business wants to use its collateral.
Key takeaways
- Equipment financing uses the equipment itself as collateral.
- A term loan can cover the equipment plus the rest of a project.
- Match the loan term to how long the equipment will stay useful.
How equipment financing works
Equipment financing is a loan to buy a specific piece of equipment, with that equipment serving as collateral. Because the lender can repossess the asset if payments stop, approval can be easier and a separate down payment or extra collateral may not be required.
The term is usually matched to the useful life of the equipment. The money can only go toward that purchase, and you own the equipment once the loan is repaid. Equipment leasing is a related option, where you rent the item instead of buying it.
How a general term loan works
A term loan provides a lump sum you repay in fixed installments. You can use it for equipment, but also for installation, training, renovations or working capital tied to the same project.
Qualifying may depend more on the business’s credit, revenue and time in operation. The lender may ask for other collateral, such as a lien on business assets, or a personal guarantee.
Side-by-side comparison
| Equipment financing | Term loan | |
|---|---|---|
| Use of funds | The equipment only | Any business purpose |
| Collateral | The equipment itself | Other assets or a guarantee |
| Approval | Often easier | Depends more on business finances |
| Term | Tied to equipment life | Set by the lender |
| Best for | One clearly priced asset | Larger projects with mixed costs |
Which one fits
- Equipment financing fits when the equipment is the main cost and has a clear resale value.
- A term loan fits when equipment is only part of a larger project, or you want flexibility in how funds are spent.
- Leasing may fit technology that goes out of date quickly.
Tip: Never choose a term longer than the equipment will stay useful. Paying for a machine after it has been replaced is money spent on nothing.
What lenders look at
For equipment financing, the lender pays close attention to the equipment: its type, age, expected useful life and resale value. Standard, widely used equipment is easier to finance than highly specialized machines. For a term loan, the focus shifts to the business itself, including revenue, cash flow, credit and time in operation.
How to compare offers step by step
- Get a written quote for the equipment, including delivery and installation.
- Ask equipment lenders and term lenders for offers on the same amount and term.
- Compare the APR, fees, down payment and any balloon payment at the end.
- Check who is responsible for insurance and maintenance during the loan.
- Compare the total cost with leasing if the equipment becomes outdated quickly.
Mistakes to avoid
Financing equipment through the seller without comparing outside offers can cost more, even when the seller’s offer is convenient. Another mistake is ignoring the end-of-term details on a lease, such as whether you can buy the equipment and at what price. Finally, make sure the new equipment will pay for itself through higher output or lower costs. Financing only makes sense if the equipment earns more than it costs.
Common questions
Can I finance used equipment?
Many lenders finance used equipment, though terms may be shorter because the remaining useful life is shorter.
What about the total cost of ownership?
Include maintenance, insurance and eventual replacement when comparing options, not only the loan payment.
Is leasing cheaper than financing?
Not always. Leasing can lower monthly costs and make upgrades easier, but over a long period buying often costs less. Compare both for the time you expect to use the equipment.
What is a balloon payment?
Some equipment loans have lower regular payments and a large final payment. It can help cash flow, but you need a plan to cover that final amount.
Can I finance software or technology?
Some lenders finance technology, but because it loses value quickly, terms are often short. Leasing is common for equipment that needs regular upgrades.
Who owns the equipment during the loan?
With equipment financing, you usually own the equipment from the start, while the lender holds a lien on it until the loan is repaid. With a lease, the leasing company owns it, and you may or may not have the option to buy it at the end.
For ongoing expenses rather than one-time purchases, compare an SBA loan with a business line of credit.