What equipment financing actually is
Equipment financing is a loan specifically used to purchase business equipment — vehicles, machinery, computers, restaurant gear, medical or dental equipment, manufacturing tools, etc. The equipment itself serves as collateral on the loan.
Because the loan is secured by an identifiable asset, lenders take on less risk than they would with unsecured working capital. That translates to lower rates, longer terms, and easier qualification for credit-challenged borrowers compared to general business loans.
Financing vs. leasing
These two get confused often. The simplest distinction: with financing, you own the equipment from day one and pay it off over time. With leasing, you're renting the equipment for a fixed period.
Equipment financing: You take a loan, buy the equipment, and own it. The lender places a UCC filing on the specific equipment until the loan is paid. Best for equipment with long useful life (over 5+ years) and predictable use.
Equipment leasing: Lower monthly payments. End-of-lease options vary — return, buy at residual value, or roll into a new lease. Best for equipment that becomes obsolete fast (technology), or when you want flexibility to upgrade.
Typical terms
Equipment financing usually carries:
- Loan amounts: 100% of equipment cost (often plus soft costs like installation and shipping)
- Terms: 24–84 months, typically matched to equipment useful life
- Rates: 6%–30% APR depending on credit, equipment type, and lender
- Down payment: 0–20% for most borrowers; can be 0% for strong credit
- Personal guarantee: Usually required for small-business equipment loans
Section 179 tax benefits
Equipment financing offers a major tax advantage many owners miss: you can deduct the full purchase price of qualifying equipment in the year it's placed in service, even if you're financing it. This is called the Section 179 deduction.
For 2025, the Section 179 deduction limit is $1,160,000 (verify current limits at irs.gov — this changes annually). The deduction phases out for businesses spending more than the threshold on equipment.
Combined with bonus depreciation, this means you can finance $100K of equipment, put very little down, and potentially deduct the full $100K against business income this year — improving cash flow even after debt service.
Section 179 deductions reduce taxable income, not your tax bill directly. Effective benefit depends on your tax rate. Always confirm with your tax professional before relying on Section 179 in a financing decision.
When equipment financing makes sense
- You need specific equipment to generate revenue (a truck for a delivery business, a CNC machine for manufacturing)
- The equipment will be used for 3+ years
- Cash from operations is better deployed elsewhere
- You want to preserve working-capital lines for other needs
- You want the Section 179 tax benefit
When to consider alternatives
- Technology that becomes obsolete fast: Leasing usually wins
- Equipment you'll use for under 2 years: Leasing or renting wins
- You're cash-rich and want simplicity: Buying outright wins
- Equipment cost is small ($5K-$10K): A working-capital loan or credit card may be simpler
Looking for equipment financing?
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Frequently Asked Questions
What credit score do I need for equipment financing?
Lower than most business loans because the equipment is collateral. Some lenders accept 550+ FICO. Strong-credit borrowers can qualify with no down payment; lower credit may require 10–20% down.
Can I finance used equipment?
Yes, though terms are often shorter and rates higher than for new equipment. Most lenders set a maximum age (often 10 years) on used equipment they'll finance.
What happens if I default on equipment financing?
The lender repossesses the equipment to recover their loan balance. Because the equipment is collateral, default does not typically result in the lender pursuing other business or personal assets, though personal guarantees may change this.