Equipment Financing Guide: How to Finance Business Equipment in 2024

Equipment financing is one of the most accessible and affordable ways for businesses to acquire the tools, machinery, and technology they need to operate and grow. This comprehensive guide covers everything you need to know about financing business equipment in 2024.

What is Equipment Financing?

Equipment financing is a type of business loan specifically used to purchase business equipment. The equipment itself serves as collateral for the loan, making it easier to qualify than unsecured business loans.

Types of Equipment You Can Finance

• Manufacturing equipment: CNC machines, industrial ovens, assembly lines
• Construction equipment: Excavators, bulldozers, cranes, trucks
• Medical equipment: MRI machines, dental chairs, diagnostic equipment
• Restaurant equipment: Commercial ovens, refrigeration, POS systems
• Office equipment: Computers, servers, phone systems, furniture
• Transportation: Delivery vans, semi-trucks, fleet vehicles
• Technology: Software, hardware, telecommunications equipment
• Agricultural equipment: Tractors, combines, irrigation systems

Equipment Loan vs. Equipment Lease: What's the Difference?

Equipment Loan (Finance to Own)

How it works: You borrow money to purchase equipment and own it outright once the loan is paid off.

Pros:

• You own the equipment at the end
• Build equity as you pay
• Can depreciate the asset for tax benefits
• Lower total cost over time
• No mileage or usage restrictions

Cons:

• Larger down payment usually required
• You're responsible for maintenance and repairs
• Stuck with equipment if it becomes obsolete
• Equipment depreciates on your balance sheet

Best for: Equipment with long useful life (10+ years), equipment you'll use long-term, businesses wanting to build assets

Equipment Lease

How it works: You rent equipment for a fixed term and return it at lease end (or have option to buy).

Pros:

• Lower monthly payments
• Little to no down payment
• Easy to upgrade to newer equipment
• Lease payments are usually 100% tax deductible
• Doesn't show as debt on balance sheet (operating lease)

Cons:

• You never own the equipment
• Higher total cost over time
• Potential penalties for early termination
• Usage restrictions may apply
• Must continue payments even if equipment breaks

Best for: Technology that quickly becomes obsolete, seasonal equipment, testing equipment before buying, businesses wanting to preserve cash flow

How Much Does Equipment Financing Cost?

Interest Rates (2024)

• Excellent credit (720+): 6% - 10%
• Good credit (680-719): 10% - 15%
• Fair credit (640-679): 15% - 25%
• Poor credit (below 640): 25% - 35%+

Factors Affecting Your Rate

• Credit score: Higher scores = lower rates
• Time in business: 2+ years preferred
• Equipment type: Essential equipment gets better rates than specialty equipment
• Equipment value: Higher value = potentially better rates
• Down payment: Larger down payments reduce rates
• Loan term: Shorter terms often have lower rates

Typical Loan Terms

• Light equipment/technology: 1-3 years
• Medium equipment: 3-5 years
• Heavy equipment: 5-7 years
• Very heavy equipment (cranes, etc.): 7-10 years

Equipment Financing Requirements

Credit Score

• 680+: Excellent approval odds with best rates
• 640-679: Good approval odds with moderate rates
• 600-639: Possible with strong business financials
• Below 600: Difficult; may need co-signer or larger down payment

Time in Business

• 2+ years: Preferred by most lenders
• 1-2 years: Possible with good credit and financials
• Startups: More challenging but possible with strong owner credit

Documentation Needed

• Equipment quote or invoice
• Business bank statements (3-6 months)
• Business tax returns (1-2 years if available)
• Business financial statements
• Personal credit check authorization
• Business license or formation documents

Down Payment

• New equipment: 10-20% down typical
• Used equipment: 15-25% down typical
• 100% financing: Available for strong credits on new equipment

Types of Equipment Financing

1. Traditional Equipment Loan

Bank or finance company lends you money to purchase equipment. You own the equipment from day one and pay back the loan over time.

• Loan amounts: $5,000 - $5,000,000+
• Terms: 1-10 years depending on equipment
• Best for: Purchasing new or used equipment to own

2. SBA 7(a) Equipment Loan

SBA-backed loan for equipment purchases. Offers longer terms and lower rates than conventional equipment loans.

• Loan amounts: Up to $5 million
• Terms: Up to 10 years for equipment
• Rates: Prime + 2.25% to 2.75%
• Best for: Established businesses wanting lowest rates and longest terms

3. Equipment Lease

You lease equipment for a set term with option to purchase, return, or renew at lease end.

• Types: Capital lease (finance) or operating lease (true lease)
• Terms: 2-7 years typical
• Best for: Technology, vehicles, equipment that needs frequent upgrades

4. Sale-Leaseback

Sell equipment you already own to a lender, then lease it back. Frees up cash without losing use of equipment.

• Typically get 50-80% of equipment value in cash
• Continue using equipment
• Option to repurchase at end of lease
• Best for: Businesses needing working capital who own valuable equipment

5. Vendor Financing

Equipment manufacturer or dealer offers financing directly.

• Often promotional rates (0% for 12 months, etc.)
• Quick approval process
• May have limited flexibility
• Best for: Taking advantage of manufacturer promotions

Equipment Financing for Specific Industries

Construction Equipment Financing

Special considerations for heavy equipment:

• Longer terms available (up to 10 years for heavy equipment)
• Seasonal payment schedules possible
• Must show contracts or steady work pipeline
• Equipment inspection often required for used equipment

Medical Equipment Financing

Healthcare-specific financing options:

• Longer terms available (5-7 years for major equipment)
• 100% financing often available
• Must show active medical practice
• Equipment must have resale value

Restaurant Equipment Financing

Tailored for food service businesses:

• Package deals for complete kitchen buildouts
• Shorter terms (3-5 years typical)
• Higher approval rates for franchises
• Energy-efficient equipment may qualify for better terms

Technology & Software Financing

For IT equipment and software licenses:

• Shorter terms (1-3 years) due to obsolescence
• Software licensing financing available
• Upgrade options built into agreements
• Bundle hardware, software, and services

Pros and Cons of Equipment Financing

Advantages

• Preserve working capital: Don't tie up cash in equipment purchases
• Easier approval: Equipment serves as collateral
• Tax benefits: Depreciation deductions or Section 179 expensing
• Build business credit: On-time payments improve business credit score
• Fixed payments: Predictable monthly costs for budgeting
• Quick funding: Often approved in 24-48 hours

Disadvantages

• Interest costs: Pay more than cash purchase price
• Obligation continues: Must pay even if equipment breaks or business slows
• Collateral risk: Equipment can be repossessed if you default
• Depreciation: Equipment loses value faster than you pay off loan
• Personal guarantee usually required: Your personal assets may be at risk

Tax Benefits of Equipment Financing

Section 179 Deduction

Allows businesses to deduct the full purchase price of qualifying equipment in the year purchased:

• 2024 limit: $1,220,000
• Phase-out threshold: $3,050,000 in equipment purchases
• Applies to: Purchased equipment (not leased)
• Requirements: Equipment must be used more than 50% for business

Bonus Depreciation

Additional first-year depreciation deduction:

• 2024 rate: 60% of equipment cost
• Declining through 2027 when it phases out completely
• Can combine with Section 179 for maximum tax benefit

Lease Payment Deduction

If you lease equipment:

• Operating lease payments are 100% deductible
• Deduct as business expense on Schedule C or corporate return
• Simpler than depreciation schedules

Important: Consult with a tax professional to determine the best tax strategy for your situation.

How to Apply for Equipment Financing

Step 1: Determine What You Need

• Specific equipment make, model, and quantity
• New vs. used
• Total cost including delivery, installation, training
• Expected useful life

Step 2: Get Equipment Quotes

• Get written quotes from equipment vendors
• Compare prices from multiple vendors if possible
• Ensure quote includes all necessary components

Step 3: Determine How Much You Can Afford

• Calculate expected ROI from equipment
• Determine comfortable monthly payment
• Consider down payment amount
• Account for operating costs (maintenance, insurance, etc.)

Step 4: Compare Financing Options

• Get quotes from multiple lenders
• Compare rates, terms, and total costs
• Consider loan vs. lease options
• Review all fees and conditions

Step 5: Submit Application

• Complete lender application
• Provide required documentation
• Submit equipment quote
• Authorize credit check

Step 6: Review and Accept Terms

• Review loan agreement carefully
• Understand all terms, fees, and obligations
• Ask questions about anything unclear
• Sign documents

Step 7: Receive Funding and Purchase Equipment

• Lender sends funds directly to vendor (typical) or to you
• Complete equipment purchase
• Equipment delivered and installed
• Begin making loan payments

Common Equipment Financing Mistakes to Avoid

1. Not Shopping Around

Rates and terms can vary significantly between lenders. Always get quotes from at least 3 lenders before deciding.

2. Choosing Loan Term Based Only on Payment

A longer term means lower payments but higher total interest. Match the loan term to the equipment's useful life.

3. Ignoring Total Cost

Focus on total cost of financing, not just monthly payment. Compare APR and total amount paid over life of loan.

4. Not Reading the Fine Print

Understand:

• Prepayment penalties
• Late payment fees
• Default provisions
• Insurance requirements
• End-of-lease options and costs

5. Overleveraging

Don't finance every piece of equipment. Maintain some cash reserves for unexpected expenses.

6. Buying More Than You Need

Just because you qualify for financing doesn't mean you should buy the most expensive option. Buy what you need.

Equipment Financing FAQs

Can startups get equipment financing?

Yes, but it's more challenging. Startups typically need:

• Strong personal credit (680+)
• Larger down payment (20-30%)
• Industry experience
• Solid business plan showing how equipment will generate revenue

Can I finance used equipment?

Yes! However:

• Equipment typically must be less than 10 years old
• Higher down payment may be required
• Shorter loan terms
• Equipment inspection may be required

How quickly can I get approved?

Equipment financing is typically faster than other business loans:

• Application to approval: 24-72 hours
• Approval to funding: 1-5 business days
• Total time: 1-2 weeks on average

Do I need a down payment?

It depends on your credit and the equipment:

• Excellent credit + new equipment: 0-10% down possible
• Good credit: 10-20% down typical
• Fair credit: 20-25% down
• Used equipment: Higher down payments generally required

Get Equipment Financing Quotes

Equipment financing can be complex, with many lenders offering different rates, terms, and specialties. Some lenders focus on specific industries or equipment types, while others are generalists.

Get matched with equipment financing lenders who specialize in your industry and equipment type. Compare rates, terms, and choose the best option for your business.