How does equipment financing work?

equipment financing

Equipment financing works by giving you the money you need to purchase equipment and machinery. You repay the money you borrow through monthly payments to the lender. Equipment financing allows business owners to get the equipment they need immediately to start earning capital. 

Nearly 80% of U.S. businesses use equipment leasing and financing to get the equipment they need to operate and grow.1 If you need equipment for your business, keep reading to learn how you can afford to start purchasing equipment and find a business equipment financing lender.

Equipment Financing: Leasing vs. Buying

Are you thinking about starting a small business? You likely need several essential pieces of business equipment to start. So, should you lease or buy your equipment? Learn the difference between equipment leasing and buying to make the best investment decision. 

Pros of a Loan or Lease for Equipment 

Lower Upfront Costs

Getting an equipment lease or equipment loan can help you get access to several essential business devices. Leasing equipment can be more affordable than financing since the initial expense is typically lower. If you don’t have a lot of money to spend on equipment, know the initial expenditures are minimal. 

Tax Deductible 

When tax time comes, your lease payments may be tax deductible. Lease payments can be deducted as a business expense on next year’s tax return. Tax deductions are highly beneficial for small business owners since they can reduce the net cost of your lease. 

Equipment Upgrades

If you eventually decide you want to upgrade any equipment, you can obtain higher-end equipment once your lease ends. Suppose you own a salon and lease basic styling chairs. Once your lease ends, you can upgrade to get mid-century modern chairs. Equipment leasing also tends to have more flexible qualification terms. 

Cons of Business Equipment Financing

Higher Costs in the Long Run

The downside of leasing equipment is that there is a higher overall cost. You are not paying to own the equipment when you lease equipment. While the monthly payment may be low, you will inevitably pay more for renting equipment over time due to interest loan fees. Depending on how high the interest rate is on your equipment loan, you could end up paying over a thousand dollars in interest. 

Leasing Agreements

Another con of leasing equipment is that you are stuck with the terms of the lease agreement. You must continue making monthly payments until the final payment date. Suppose you lease a heat press machine but decide to forego selling shirts on your online store. You will still have to continue paying to use the device or face costly early termination fees. 

Pros of Buying Equipment 

Equipment Ownership

The benefit of buying is that you will own the equipment. Every payment you make helps you earn more equity if you finance the equipment. Buying is incredibly beneficial for top-of-the-line equipment pieces that help improve productivity. Once you make the final loan payment, you have assets to your name. 

Tax Deductions on New Equipment

Buying equipment offers tax incentives for business owners. According to Section 179 of the Internal Revenue Code, you can deduct the total cost of qualifying new equipment pieces in the first year. If your small business financed $50,000 worth of eligible equipment, you could deduct the entire amount from your taxable income. 

Depreciation Deduction

All assets depreciate over time since use can lower their value. However, you may be able to get depreciation deductions for business equipment! Depreciation deductions can be beneficial if your business equipment doesn’t qualify for the Section 179 deduction. 

Cons of Buying Equipment 

Higher Upfront Cost

The downside is that buying equipment requires more financial capital upfront than leasing. For example, you may be able to lease an espresso machine for $30 a month, but buying a new commercial machine can cost upwards of a thousand dollars! 

You are subject to credit approval if you decide to use an installment loan to finance the cost of buying new or used equipment. Lenders will consider your credit score, income, payment history, etc. Suppose your personal credit score is less than perfect. In that case, you may not get a substantial loan amount or affordable interest rates. 

Outgrowing Equipment

One risk of buying equipment is that you can outgrow it. For example, you may purchase a top-of-the-line POS system, but that technology may become obsolete in a few short years. The worst part is that some equipment pieces have low resale value, so you may not get even half as much money as you put in. 

What Is an Equipment Loan?

Equipment financing is a type of asset-based financing. Financing allows you to get the specialty equipment you need to run your small business and pay off the high cost through monthly installments. An equipment loan is ideal for small business owners who need essential equipment pieces but don’t have a lump sum to pay upfront. 

An equipment loan is a type of secured loan since the equipment is used as collateral. When you get approval for equipment loans, you will typically have to sign an Equipment Financing Agreement (EFA). In the event a borrower cannot repay their secured loan, equipment financing companies can repossess the equipment to recoup funds. 

Small business equipment loans can provide thousands of dollars to small business owners who need money for various equipment pieces. The cost of borrowing will vary per lender and the terms of your loan. Interest rates vary greatly, typically from 8% to 30%. Equipment loan terms depend on your credit score, business background, income, etc. 

While equipment loans are typically easier to get than a business loan, there are drawbacks. One downside of equipment loans is that many financial institutions will only pay 80% to 90% of the cost of the equipment for a business. That means you will have to provide 10% to 20% of the price on your own. If you get an equipment loan to buy a $15,000 commercial convection oven, you will have to provide at least a $1,500 down payment. 

Leased Equipment vs. Financed Equipment  

If you need money to buy new or pre-owned equipment, consider financing! Business owners with low and high credit scores can choose to purchase or lease the essential equipment pieces they need to keep their business running. The best option depends on how much money you want to invest and if you want to keep the equipment. 

Certain pieces of business equipment can become outdated within a few years, so it may be better to lease. Leasing allows you to use equipment temporarily. Once the lease ends, you can upgrade or buy different equipment. But it makes sense to buy if you intend to use the equipment for long periods and know the item won’t become outdated quickly.

Alternative Equipment Financing Options

Are you wondering if you need good credit to start a business? It’s possible to get loans with poor credit, but you may have to look for business loan alternatives. If you need money with bad credit, know there are alternative loan options to afford the high cost of essential equipment pieces. 

Financing OptionDescription
Personal LoanShort to long-term installment option with no down payment, flexible usage for business equipment. Eligibility based on credit score and income. Online no credit check loans available for those with bad credit.
Business LoanChallenging to qualify for but offers higher amounts, up to $500,000. Requires detailed information, including credit history, annual revenue, years in business, and a comprehensive business plan. Ideal for substantial funding for business equipment.
Line of CreditFunctions like a credit card with lower APR and higher credit limits. Requires a good credit score for qualification, with stricter requirements than credit cards. Suitable for ongoing financing needs related to business equipment.

Personal Loan

A personal loan is a short to long-term installment option. Using personal installment loans for business equipment means there is no down payment. If you get loan approval, your lender will provide a lump sum. 

A convenient benefit of personal loans is that you can use your loan money on just about anything! There are no spending restrictions. You can buy a security system, shipping supplies, software, etc. Loan amounts range greatly, so you can get as little or as much as you need. 

Eligibility for unsecured loans depends mainly on your credit score and income. If you have bad credit, rest easy knowing there are online no credit check loans. You can avoid the damaging effects of a hard credit inquiry. 

Business Loan

Many small business owners struggle to decide between a personal loan and a business loan. When it comes to a personal loan vs. a business loan, you should know that a business loan is typically more challenging for consumers to qualify for. Still, they can offer a lot more money. Depending on your business background, you could get as much as $500,000!

To qualify for a business loan from a bank or credit union, you need to provide a lot of information. Most lenders will require your credit history, annual revenue, years in business, business plan, and more. A business plan is a detailed document that states your business goals, services, and finances. You must include financial projections and outline your future business plans. 

Line of Credit

Many people get lines of credit for personal expenses. But you can get a business line of credit to finance business equipment! Lines of credit work like credit cards, but they typically offer lower APR and higher credit limits. You can use credit checks or electronic transfers to access a line of credit.

To open a line of credit, you need to have a good credit score. Lines of credit typically have stricter qualification requirements than credit cards. If your FICO score is not higher than 670, you may not qualify for a business line of credit. 


What is equipment financing, and how does it differ from equipment leasing?

Equipment financing is a loan used to purchase necessary equipment outright, whereas equipment leasing involves renting the equipment for a specified period. Financing allows you to own the equipment after all monthly payments are made, while leasing offers the flexibility to upgrade or change leased equipment as business needs evolve.

How can equipment financing benefit my company’s cash flow?

Equipment financing can positively impact your cash flow by spreading the cost of expensive equipment over time. This allows you to retain more cash on hand for other business needs rather than spending a large down payment to purchase equipment.

In terms of cash flow, is it better to opt for a loan or lease for equipment?

The decision to choose a loan or lease for equipment depends on your cash flow situation. Leasing might be better for short-term flow as it typically requires lower monthly payments. However, a loan could be more cost-effective in the long run if you plan to use the equipment for an extended period.

What should I consider when deciding on the equipment financing terms?

When considering equipment financing terms, evaluate the interest rate, the total amount of monthly payments, the loan term, and how these factors align with your business’s financial planning. It’s important to choose terms that are manageable and don’t strain your business’s cash flow.

Can I finance used equipment, or does equipment finance only apply to new purchases?

Equipment finance can apply to both new and used equipment purchases. However, the financing terms might vary based on the equipment’s age and condition. It’s advisable to consult with equipment financing professionals to understand the best options for your needs.

How do I determine whether to buy equipment outright or use equipment financing?

Deciding whether to buy equipment outright or use equipment financing depends on your business’s financial health and long-term goals. If you have ample cash reserves and the equipment is essential for long-term operations, buying outright might be beneficial. However, if preserving cash flow is a priority, financing can be a more viable option.

What role do equipment financing professionals play in helping businesses obtain equipment?

Equipment financing professionals provide expert advice on the best financing options to suit your business needs. They can help you understand the nuances of different financing products, assist in navigating the application process, and ensure you obtain equipment in a financially prudent manner.

What CreditNinja Wants You To Know About Equipment Financing

Equipment financing can help prospective business owners get their ideas off the ground and start working for themselves. There are plenty of loan options available, whether you want to lease or buy business equipment. Just ensure you explore all avenues before locking yourself into a financial contract.

If you need money to buy or lease business equipment, consider using a CreditNinja personal loan. The approval process is done entirely online and you do not need to provide a business plan to get funding for business expenses. Fill out our online application form to see if you are eligible!  


  1. Top 10 Equipment Acquisition Trends for 2020 │ Business Wire
  2. Business Equipment: Buying vs. Leasing │ Nolo
  3. What Is Equipment Financing & How Does It Work? │ Merchant Maverick

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