Equipment Financing for Small Business: A Complete Guide

Equipment Financing for Small Business: A Complete Guide

Every business depends on equipment to operate, whether it is a commercial oven in a restaurant kitchen, a fleet of service vehicles, manufacturing machinery on a factory floor, or computers and software in a professional office. Purchasing that equipment outright can drain your cash reserves and limit your ability to invest in other areas of the business. Equipment financing solves this problem by letting you acquire the tools you need while spreading the cost over time.

This guide explains how equipment financing works, compares financing versus leasing, outlines qualification requirements, and helps you determine whether this type of funding is right for your business.

What Is Equipment Financing?

Equipment financing is a type of business loan specifically designed for purchasing equipment. The equipment itself serves as collateral for the loan, which reduces the lender's risk and typically results in more favorable terms than unsecured financing.

Here is how it works in practice:

1. You identify the equipment your business needs and get a quote from the vendor.
2. You apply for equipment financing with a lender, providing the equipment details and your business financials.
3. The lender approves the financing and either pays the vendor directly or reimburses you after purchase.
4. You repay the loan in fixed monthly installments over a set term, usually matching the useful life of the equipment.
5. Once the loan is fully repaid, you own the equipment free and clear.

Equipment Financing vs. Equipment Leasing

Business owners often debate whether to finance or lease equipment. Both approaches let you use equipment without paying the full cost upfront, but they differ in important ways.

Equipment Financing (Loan)

• You own the equipment from day one
• Fixed monthly payments over a set term
• You can depreciate the asset on your taxes
• Section 179 deduction may allow you to write off the full purchase price in the year of acquisition
• At the end of the term, you own the equipment with no further payments
• Best for equipment with a long useful life that retains value

Equipment Leasing

• The leasing company owns the equipment; you pay for the right to use it
• Payments may be lower than a loan because you are not financing the full cost
• At the end of the lease, you typically have the option to buy the equipment at fair market value, return it, or renew the lease
• Operating leases may not appear as debt on your balance sheet, which can improve financial ratios
• Best for equipment that becomes obsolete quickly, like technology hardware

Which is better? It depends on the type of equipment and your business strategy. If the equipment will serve you for many years — like a CNC machine, a commercial vehicle, or restaurant cooking equipment — financing usually makes more sense because you build equity in the asset. If the equipment will need to be replaced every two to three years due to technological advances, leasing gives you more flexibility.

Types of Equipment You Can Finance

Nearly any tangible business asset can be financed. Common categories include:

• Vehicles and fleets: Trucks, vans, cars, trailers, forklifts
• Manufacturing equipment: CNC machines, lathes, presses, assembly lines
• Restaurant and food service: Ovens, refrigerators, fryers, point-of-sale systems
• Construction: Excavators, cranes, bulldozers, scaffolding
• Medical and dental: Imaging machines, exam tables, sterilization equipment
• Technology: Servers, computers, networking equipment, software licenses
• Office equipment: Furniture, copiers, phone systems
• Auto repair and service: Lifts, diagnostic tools, compressors, alignment machines

Auto repair shops and restaurants are among the most frequent users of equipment financing because their operations depend heavily on specialized machinery that carries a high upfront cost.

Benefits of Equipment Financing

Preserve cash flow. Instead of depleting your bank account with a large purchase, equipment financing lets you keep cash available for operating expenses, marketing, hiring, and other growth investments.

Predictable budgeting. Fixed monthly payments make it easy to plan your finances. You know exactly how much the equipment costs each month for the duration of the term.

Tax advantages. Business equipment purchased through financing may qualify for Section 179 deductions, bonus depreciation, and interest expense deductions. Consult your accountant for specific guidance, but these tax benefits can significantly reduce the effective cost of financing.

Access to better equipment. Financing allows you to acquire higher-quality equipment than you might be able to afford with cash alone. Better equipment often translates to higher productivity, better quality output, and more competitive positioning.

Build business credit. Successfully repaying an equipment loan builds your business credit profile, which makes it easier and cheaper to borrow in the future.

The equipment is the collateral. Because the equipment secures the loan, lenders do not typically require additional collateral. This means your other business and personal assets remain unencumbered.

Qualification Requirements

Equipment financing is one of the more accessible forms of business lending because the equipment collateral reduces lender risk. Here is what most lenders require:

• Credit score: 600 and above for most lenders; some work with scores as low as 550
• Time in business: 1 year minimum is typical, though some lenders finance startups with strong personal credit
• Down payment: 0 to 20 percent depending on credit profile and equipment type
• Equipment quote: A formal quote or invoice from the equipment vendor
• Financial documentation: Business bank statements (3 to 6 months), tax returns, and a profit and loss statement

For newer businesses or those with credit challenges, a larger down payment can offset the risk and improve your chances of approval.

Interest Rates and Terms

Equipment financing rates vary based on your credit profile, the age and type of equipment, and the lender. Here are general ranges:

• Interest rates: 4 to 30 percent APR
• Loan terms: 1 to 7 years, typically matched to the equipment's useful life
• Down payment: 0 to 20 percent
• Funding speed: 2 to 7 days for most online lenders; longer for banks

New vs. used equipment: Financing new equipment typically comes with lower rates and longer terms than financing used equipment, because new equipment holds its value better and has a longer remaining useful life.

The Application Process

Applying for equipment financing is straightforward:

1. Get a quote. Obtain a formal price quote from the equipment vendor, including specifications, model numbers, and delivery terms.
2. Compare lenders. Shop around for the best rates and terms. Consider banks, credit unions, equipment finance companies, and online lenders.
3. Submit your application. Provide your business information, financial documents, and the equipment quote.
4. Review and accept the offer. Once approved, review the loan terms carefully, including the interest rate, total cost, payment schedule, and any fees.
5. Receive the equipment. The lender pays the vendor, the equipment is delivered, and you begin making payments.

Tips for Getting the Best Deal

Compare multiple offers. Do not accept the first offer you receive. Even a one-percent rate difference can save you thousands over the life of the loan.

Negotiate with the vendor. Vendors often have preferred financing partners and may be able to offer special rates or bundle the financing with the purchase.

Consider the total cost. Look beyond the monthly payment and calculate the total amount you will pay over the loan term, including all fees and interest.

Time your purchase strategically. Buying equipment at the end of the fiscal year can maximize your Section 179 deduction, and vendors may offer discounts to clear inventory.

Maintain your equipment. Proper maintenance protects your investment and ensures the equipment retains its value, which matters if you ever need to sell it or use it as collateral for additional financing.

Ask about soft costs. Some equipment loans cover more than just the equipment purchase price. Installation, training, shipping, and software licensing may be included in the financing package. Ask your lender what qualifies as a financeable soft cost.

Frequently Asked Questions About Equipment Financing

Can I finance used equipment?

Yes, most lenders finance used equipment, though terms and rates may differ from new equipment financing. The equipment must be in good working condition and have remaining useful life that exceeds the loan term. Expect to provide an appraisal or detailed description of the equipment's condition, age, and market value.

What if my business is a startup?

Startups can qualify for equipment financing, especially if the owner has strong personal credit and can provide a larger down payment. Some lenders offer startup-specific equipment programs that rely more heavily on the owner's personal financial profile. Having a solid business plan and industry experience strengthens your application.

Can I finance equipment from a private seller?

Many lenders allow you to purchase equipment from private parties, not just authorized dealers. You will need to provide documentation of the sale, including the seller's information, a description of the equipment, and a fair market valuation. The lender may require an independent appraisal.

What happens if I cannot make payments?

If you default on an equipment loan, the lender can repossess the equipment to recover their loss. Because the equipment is the collateral, a default does not typically put your other business assets at risk unless you also signed a personal guarantee or a blanket lien. However, defaulting will damage your credit score and make future borrowing more difficult.

Does equipment financing affect my other borrowing capacity?

Equipment loans do appear on your credit report and factor into your debt-to-income ratio. However, because the equipment serves as collateral, many lenders view equipment debt more favorably than unsecured debt when evaluating your capacity for additional financing.

Getting Started with Brevo Capital

At Brevo Capital, we connect you with lenders who specialize in equipment financing across a wide range of industries. Whether you are outfitting a new location, upgrading aging machinery, or expanding your fleet, we simplify the process so you can focus on running your business.

Apply now and get matched with equipment financing options tailored to your needs.