What Are The Pros And Cons Of Equipment Loans?

If you don’t have thousands of dollars in the bank to buy business equipment, then an equipment loan can get you what you need. Equipment loans can finance office furniture, point-of-sale systems, trucks, cars, farming machinery and more, making them a versatile option for business owners looking for funding.

The equipment you finance also acts as collateral, lowering your borrowing costs and making your application more appealing to lenders. As such, equipment loans can be a good option if you have a lower credit score or low time in business.

According to the Federal Reserve Banks’ 2024 Small Business Credit Survey, 68 percent of auto or equipment loan applications were fully approved, the highest approval rate of any loan type. While equipment loans can help companies purchase essential machinery or equipment, it’s important to consider the pros and cons of equipment loans before signing on the dotted line.

Compare the pros and cons of equipment loans

Pros

• Flexible financing
• Lower approval requirements
• Credit-building opportunities
• Built-in tax breaks
• Ownership instead of renting

Cons

• Limited to financing equipment
• May require a down payment
• Loan could outlast life of equipment
• Maintenence costs extra
• Lender can seize the equipment if you default

Pros of equipment loans

If you need to acquire equipment for your business, there are lots of pros to using an equipment loan.

Flexible financing

Equipment loans can be used to fund a variety of equipment types, from computers to construction equipment. This type of financing also saves you from having to tie up large sums of cash purchasing equipment. With a loan, you spread the cost over the life of the loan, which can be anywhere from three and 10 years. Longer terms can mean lower monthly payments, though with the interest rate, you may end up paying more interest overall.

Fast funding

Many lenders offer relatively quick funding for equipment loans, especially if you go with an online lender. You may be able to receive funds in as little as 24 to 48 hours. Banks may take up to a week to approve funding, though their underwriting process is faster for this type of loan than with unsecured loans.

Credit-building opportunities 

Getting any kind of loan can help your company build credit, but an equipment loan is one of the easier ways to start building credit. They’re usually easy to qualify for, even if your company has no operating history. Just be sure to make your payments on time to avoid any hits to your credit.

Built-in tax breaks

Section 179 of the IRS tax code allows you to write off the total cost of the equipment or machinery the year you bought it, even though you’re making payments and don’t yet own it in full. Depending on the equipment value, this can result in considerable tax savings. Starting in the tax year 2024, the maximum section 179 expense deduction is $1,220,000, and the total equipment value for the 2025 tax year is $3.13 million.

Ownership instead of renting

Leasing equipment is like renting, you pay to borrow it but then have to return it without getting any of the investment benefits. When you finance business equipment, you get to keep it even after paying off the loan. This is especially beneficial for equipment that will last longer than your loan term, such as office or restaurant furniture and farm equipment.

Cons of equipment financing

Before getting an equipment loan, you have to consider the drawbacks before applying.

Limited to financing equipment

Equipment financing is limited in use. You can only use it to purchase or repair equipment and only equipment that the lender agrees is adequate to serve as collateral. If you need funding for other purposes, you’ll have to look at other types of business loans.

May require down payments

Many equipment loans require a down payment of as much as 20 percent of the equipment’s cost. If you’re buying expensive equipment, you might need a lot of cash, or you may have to look into leasing if you can’t afford a sizable down payment.

Loan could outlast the life of equipment

There’s a chance, especially if you get a long-term loan, that the loan will outlast the equipment you purchase. For example, if you get a 10-year loan, but the equipment breaks after five years, you’re stuck with five years of payments for something you can’t use anymore. Even if it doesn’t break, it may still wear out, become less useful, or become obsolete.

Before signing for equipment financing, make sure the equipment is in good shape and will outlast your loan term. You could also look into getting a warranty or insurance on the equipment to cover major repairs, extending its usable life.

Maintenance costs extra

Just like financing a vehicle, you’re still responsible for maintenance costs and repairs if the equipment breaks down while you’re making payments on the loan. Though some maintenance is routine and expected, the equipment may break down at any time, increasing the overall cost of owning it.

Lender can seize the equipment if you default

If you fail to make payments and default on the loan, the lender has the right to seize the equipment and sell it to recoup the loan cost. You will lose all the value that you invested into the equipment.

To avoid this scenario, ensure that you can easily manage loan repayments, fitting the repayments into your business budget. If your business revenue takes a hit during the loan and you think you’ll miss a payment, contact the lender to see if they will work with you.

How to determine if an equipment loan is right for you?

An equipment loan makes sense for your business if:

• You can’t afford to buy equipment outright
• You want to own the equipment at the end of the loan
• You’re looking for the lowest overall loan costs
• You want to keep liquid cash on hand for other business needs
• You’re willing to use the equipment as collateral for the loan

If you don’t want to use the equipment as collateral, you may be better off with other business loans, like an unsecured term loan or a line of credit, though this can come with higher interest rates and approval requirements.

If you don’t have great credit, such as a 500 personal credit score, you might look into alternative financing, like a merchant cash advance.

Should you finance equipment?

Whether you finance your equipment purchase depends on how much capital your business has and how much extra you’re able to pay for equipment purchases.

Many businesses use an equipment loan to help them keep cash reserves and cash flow within their business, paying off the equipment in small increments. If you have plenty of capital, you could save money on interest by buying the equipment outright.

Bottom line

Equipment financing is flexible and widely available, even for startups and businesses needing bad credit financing. Shop around to compare equipment loans from a few sources to ensure you get the best rate and lowest fees. You can also compare equipment loans with other top loans on the market to make sure you’re choosing the best option.

Frequently asked questions about equipment financing

• What credit score do you need for equipment financing?

  One of the benefits of equipment financing is that it’s easier to qualify for than other loans. Each lender will set its own minimum credit score requirements, but a minimum personal credit score of 600 isn’t unusual. Keep in mind that a credit score is just one factor lenders consider. They’ll also examine your revenue, operating history, down payment, and other factors.

• What equipment can be financed?

  You can finance almost any equipment for a business, from heavy equipment to storage tools to IT systems. Examples include cranes, excavators, trucks, servers, software, computers, food packaging tools, industrial coolers and box makers.

• How hard is it to get an equipment loan?

  Equipment loans are typically not hard to get. You can qualify for one with moderate credit and a sufficient down payment, even if you’re running a startup.