Types of Equipment Financing | Bankrate

From general term loans and lines of credit to equipment loans and loans backed by the SBA, your business has plenty of equipment financing options. Each comes with its own advantages and disadvantages, such as longer loan terms, low interest rates or the ability to use the newest equipment without ownership.

To choose the right loan for your business, make sure you know how the different types of equipment financing work and which lenders offer them.

Types of equipment financing

While businesses often use equipment loans to finance equipment, you can buy equipment with many types of business loans. Your equipment financing options include:

Term loans

Term loans allow your business to borrow a lump sum and repay it over five to 10 years on average. This flexible type of loan can suit various needs, including working capital or large one-time expenses.

Term loans can be unsecured or secured, though most equipment loans are secured. A secured loan is backed by business assets, which means that the lender can seize the asset if you don’t make loan payments, making it less risky for the lender. You may be able to get lower interest rates and more favorable repayment terms with a secured loan.

Term loans work best if you’re looking for:

• Fixed payments over a set period of time
• Larger loan amounts
• Options for secured and unsecured loans

SBA loans

SBA loans are government-backed loans offered through approved SBA lenders. These loans come with competitive interest rates and long repayment terms, making them ideal for business owners looking for manageable payments. They are designed for businesses that can’t qualify for traditional financing. However, SBA loans can take 30 to 90 days to fund, so you’ll have to be patient.

The Small Business Administration (SBA) offers several types of loans that can be used to purchase equipment:

• 7(a) loans. These are the most common type of SBA loan and are available from many lenders. This type of loan can be used for general working capital expenses or to purchase equipment.
• 504 loans. A 504 loan is designed to purchase large equipment. Your business can borrow up to $5.5 million, and for working capital loans, repayment lasts anywhere from five to 10 years.
• Express loans. These work the same as 7(a) loans, although the loan amount is limited to $500,000. But the SBA doesn’t need to approve these loans, making the approval time much faster.
• Microloans. For newer businesses, especially those owned by women, minorities and other underserved communities, a microloan is more accessible than the 7(a) and 504 loans. While you are limited to just $50,000 for equipment, you should be able to qualify with low credit or revenue.

SBA loans work best if you’re looking for:

• More affordable loan rates
• Financing when you can’t otherwise obtain any
• A variety of loan options

Equipment loans

Equipment loans are the standard option for financing equipment since the loan is backed by the equipment being purchased. They are widely available from banks and other lenders, but you can also find financing options through the seller.

Since equipment loans are secured by the equipment, there is less risk to the lender, offering lower interest rates than unsecured loans. They also tend to offer more accessible eligibility requirements, accepting new businesses and business owners with bad credit. 

That said, interest rates for equipment loan can be high, with some APRs reaching 30 percent or higher depending on factors like your creditworthiness and business revenue.

Equipment loans work best if you’re looking for:

• Equipment-specific financing
• Better approval odds
• Built-in collateral options

Equipment leases

As an alternative to an equipment loan, you can opt for an equipment lease. Equipment leases come with smaller monthly payments and may not require a down payment like an equipment loan might. What happens at the end of your lease depends on the type of lease you sign.

Operating leases: These allow you to use the equipment for the lease term and then return it in good condition. It gives your business access to the equipment you need and is a good option if you are in an industry that requires frequent updates to your tech.

Capital leases: These allow your business to purchase the equipment at the end of the lease period. They have lower payments like an operating lease, but you may be required to make a balloon payment, a large payment at the lease’s end, to cover any residual value once your lease is finished.

Equipment leases work best if you’re looking for:

• Less risk than an equipment loan
• Use of equipment without the need for ownership
• Short-term equipment usage

Business lines of credit

Lines of credit work like business credit cards. Your business has access to a credit limit the lender sets, and you can draw and repay as needed. This makes them a good choice for businesses that frequently need smaller equipment purchases or repairs.

With lines of credit, you only pay interest on the amount you use. As you pay back the loan, the credit limit replenishes, allowing you to borrow from the credit line again. This gives your business plenty of flexibility based on cash flow and other operating expenses.

Business lines of credit typically have larger loan amounts and lower starting interest rates than business credit cards, though they lack certain features that business credit cards have like grace periods, 0 percent introductory APR offers and the chance to earn rewards on purchases.

Business lines of credit work best if you’re looking for:

• Flexible financing
• Quick funding
• Lower loan amounts

What can equipment financing be used for?

Equipment financing loans are most often used for buying commercial equipment, which may or may not be related to the product or service that you sell. This can include:

• Building HVAC
• Office furniture
• Computers
• Point of sale systems
• Delivery vehicles
• Manufacturing equipment
• Farming equipment
• Walk-in fridges and freezers

Keep in mind that since the equipment you buy is used as collateral, the lender may have conditions about the type and state of the equipment you purchase. For example, you may not be able to get funds for equipment that:

• Is outside of the manufacturer’s warranty
• Is a Lemon Law vehicle
• Does not meet current safety standards and regulations
• Has not been maintained according to manufacturer’s instructions
• Is severely depreciated 

Bottom line

There are many equipment financing options and alternatives to suit almost every business. The right choice will depend on how your business is set up and what funding amounts and features you need. Consider each option carefully and make sure to have a plan in place to successfully manage any equipment loan.

Frequently asked questions

• What is better: a lease or a loan?

  It depends on how your business will use its equipment. Equipment loans tend to be less expensive overall, and you keep the equipment once you finish paying the loan. For businesses in industries where you need to update your equipment frequently, a lease may be better. They are less expensive in the short term and allow you to switch to a newer model at the end of the lease period.

• What are the disadvantages of equipment loans?

  The main disadvantage of an equipment loan is that the loan must be used for buying equipment. You can get approved for other types of loans that may allow you to use the loan for other purposes. Another disadvantage is that the equipment may depreciate during the life of the loan, while the loan will be based on the purchase cost. This means that if you sell the equipment later, its current value may or may not cover the loan’s principal amount.

• What are the benefits of equipment financing?

  Equipment financing gives your business access to technology, machinery and other essentials that it may not otherwise be able to afford. They can help build your business’s credit score. And since they act as the collateral for a loan, you may be able to get lower rates alongside a faster application process.