Equipment financing: loans, leases and what you actually pay
Equipment financing pays for a specific machine, vehicle or piece of technology, and the equipment itself usually secures the deal. Because the lender has something concrete to fall back on, it is often easier to get and cheaper than unsecured funding. The main decision is whether to borrow and own, or lease, and which kind of lease.
- Typical amount
- From a few thousand dollars up to the cost of the equipment
- Collateral
- The equipment being financed
- Down payment
- Often 0% to 20%, depending on credit and equipment
- Term
- Commonly 2 to 7 years, tied to the equipment's useful life
- Repayment
- Usually fixed monthly payments
- Best for
- Equipment that earns its keep over several years
How equipment financing works
You pick the equipment and get a quote from the seller. The lender or lessor pays the seller directly, and you make regular payments over a set term. The lender typically files a lien on the equipment, and in a lease it may own the equipment outright until the end. If you stop paying, it can repossess the equipment.
That collateral is what makes the product work. Lenders care about your credit and cash flow, but they also look closely at the equipment: what it is, how long it lasts, and what it would sell for if they had to take it back. Equipment that holds its value, such as trucks and common construction machinery, is generally easier to finance than specialized or fast-depreciating gear.
Loans vs leases
With an equipment loan, you own the equipment from the start. The lender holds a lien until the loan is repaid, and you carry the risk and benefit of its value. With a lease, the lessor owns it and you pay to use it. What happens at the end depends on the type of lease.
- $1 buyout lease. You can buy the equipment for a nominal $1 when the term ends. Payments are higher because they cover nearly the full cost. In substance it works much like a loan, and it is often treated like a purchase for tax and accounting purposes.
- Fair market value (FMV) lease. At the end you can return the equipment, renew, or buy it for its market value at that time. Payments are lower because you are paying for the equipment's use, not all of its value. It suits gear you expect to replace, such as computers or equipment that goes out of date quickly.
Some leases use a fixed percentage buyout instead, often around 10%. It sits between the two.
| Equipment loan | $1 buyout lease | FMV lease | |
|---|---|---|---|
| Who owns it during the term | You, with a lien | The lessor | The lessor |
| Monthly payment | Higher | Higher | Lower |
| At the end | You own it outright | You buy it for $1 | Return, renew or buy at market value |
| Upfront cash | Often a down payment | Often first and last payment | Often first and last payment |
| Suits | Long-life equipment you'll keep | Equipment you'll keep | Equipment you'll replace |
An FMV lease can look cheapest month to month. If you end up buying the equipment at the end, the total can exceed what a loan would have cost, so price both paths before you choose.
A worked example
Say you are buying an $80,000 machine and are offered 9% over 60 months.
- With 10% down. You pay $8,000 up front and finance $72,000. The payment is about $1,495 a month, and total interest over five years is about $17,680.
- With nothing down. You finance the full $80,000. The payment rises to about $1,661 a month, and total interest is about $19,640.
The down payment saves roughly $1,960 in interest and lowers the payment by about $166 a month. It also uses $8,000 of cash you might need elsewhere. Neither choice is wrong. The question is whether that cash earns you more than $1,960 over five years kept in the business. Remember too that the lender's rate depends on your credit, the equipment and the term, so your figures will differ.
Compare offers on total cost, not monthly payment. A longer term or a large end-of-lease buyout can make a smaller payment the more expensive deal.
Down payments, soft costs and used equipment
Down payments. Strong credit and equipment that holds its value can sometimes be financed with little or nothing down. Newer businesses, weaker credit and specialized equipment usually mean a larger down payment. Leases often ask for the first and last payment instead.
Soft costs. These are the expenses around the equipment: delivery, installation, training, software and sometimes sales tax. Some lenders will roll a portion into the financing, but many cap how much, because soft costs have no resale value if the deal goes bad. Ask early, so you don't have to pay for installation out of pocket.
Used equipment. Used gear is often financeable, especially from a dealer. Expect shorter terms and sometimes a higher rate or larger down payment, because the lender is lending against an asset with less remaining life. Private-party purchases may need an inspection or appraisal.
A note on taxes
Section 179 of the tax code can let a business deduct some or all of the cost of qualifying equipment in the year it is placed in service, rather than depreciating it over several years. The limits change, and how a loan or lease is treated depends on its structure and your situation. Talk to your tax advisor before choosing between a loan and a lease for tax reasons, and don't let a seller's tax pitch make the decision for you.
When equipment financing fits, and when it doesn't
It is usually a good fit when:
- the equipment will produce revenue or savings for longer than the term;
- you want to keep cash and other credit available for operations;
- you need a specific asset and have a quote in hand.
It is a weaker fit when the equipment will be obsolete before the term ends, when you need the money for something other than the equipment, or when the payments would strain cash flow in slow months. For general operating needs, look at a working capital loan or a business line of credit. Larger purchases bundled with real estate or expansion may fit an SBA loan. Using a merchant cash advance to buy long-life equipment is usually an expensive mismatch.
Contract terms to check
- End-of-term options. The exact buyout price or how fair market value will be determined, and the notice you must give.
- Automatic renewal. Some leases renew month to month if you miss the notice window.
- Total of payments. Every payment plus the buyout, compared with the purchase price.
- Return conditions. Wear standards, shipping and restocking costs on an FMV lease.
- Insurance and maintenance. You are usually required to insure and maintain the equipment.
- Prepayment. Whether paying off early saves interest or the full remaining payments are still due.
- Collateral reach. Whether the lien covers only this equipment or all business assets, plus any personal guarantee.
- Fees. Documentation, origination and late fees.
Ready to compare offers? You can check your options in about two minutes.