Financing Guide
Equipment Financing
Reviewed and updated 2026-05-25 · Figures are dated industry references, not offers of credit
Equipment financing is a secured loan or lease used to acquire business equipment, with the equipment itself serving as the primary collateral and a term typically matched to the asset's useful life. Because the equipment itself secures the loan, equipment financing is often available on better terms than unsecured business credit — and is frequently accessible to businesses that would not qualify for unsecured financing at all. Rates typically run approximately 6% to 30% apr, varying by borrower credit, time in business, and equipment type, with terms generally matched to the useful life of the asset.
How equipment financing actually works
The equipment is the collateral
The defining feature of equipment financing is that the asset being purchased secures the loan. The lender takes a title interest or files a UCC lien on the equipment, and if the borrower defaults, the lender repossesses it rather than going after the business’s other assets first. That arrangement lowers the lender’s risk, which is why pricing on equipment loans tends to beat unsecured business credit and why approval is available to borrowers whose credit profile alone would not pass. A personal guarantee is usually still required from any owner of 20% or more, but the equipment is the primary security.
Financing vs. leasing
Equipment can be acquired through either a loan or a lease, and the right answer depends on the equipment, the business, and its tax position.
- A loan or equipment finance agreement transfers ownership of the equipment to the business — either at funding or upon final payment. The business carries the equipment on its balance sheet, depreciates it, and walks away with the asset at the end of the term.
- An operating lease lets the business use the equipment for a defined period, then return it. Monthly payments are often lower than loan payments because the business is paying for use, not ownership. Operating leases tend to fit short-useful-life or fast-obsolescence equipment — medical imaging, computer hardware, copiers.
- A capital lease (commonly structured as a $1 buyout or 10% PUT) functions economically like a loan: the business uses the equipment, then acquires it for a nominal end-of-term payment. Capital leases are typically used when the business wants ownership at the end but prefers the lease structure for accounting or tax reasons.
The decision usually comes down to three questions: How long will the equipment actually be useful? How fast does it depreciate or become obsolete? And does the business have the taxable income to take advantage of Section 179 or bonus depreciation if it owns the asset? Different answers point to different structures.
Terms are tied to useful life
Equipment loan terms typically run 2 to 7 years for most business equipment, up to 10 years for long-lived heavy machinery. Lenders are not going to write a 10-year loan against a 5-year asset — the collateral would be worth less than the remaining balance well before maturity. As a result, a long-lived asset like a heavy truck, an industrial press, or a CNC machine can carry a longer loan; a shorter-lived asset like commercial kitchen technology or specialty office equipment gets a shorter term. Trying to stretch a term beyond the useful life of the equipment is one of the few requests lenders simply do not honor.
Rates depend on credit, time in business, and the equipment itself
Pricing in equipment financing varies widely: approximately 6% to 30% apr, varying by borrower credit, time in business, and equipment type. The three drivers, in roughly that order:
- Borrower credit — personal FICO of the principal, business credit history, and any prior bankruptcies or defaults.
- Time in business — established operators price tighter; start-ups and newer businesses pay more, even on the same equipment.
- Equipment type and marketability — standard, widely resold equipment (commercial trucks, common construction machinery, well-known restaurant brands) prices better than niche, custom-built, or fast-depreciating assets. The lender is pricing the salvage value alongside the credit.
Down payments range from 0% to 20% of equipment cost, depending on lender, credit, and equipment type. Funding speed runs often within several business days; complex or large-ticket deals may take 1 to 3 weeks — faster than an SBA loan, slower than an MCA.
Section 179 and the tax case
Section 179 of the Internal Revenue Code is the reason equipment financing has a tax angle worth thinking about — not just a financing angle. The mechanism: a business can deduct the full purchase price of qualifying equipment in the year it is placed in service, up to an annual cap that is indexed for inflation, with bonus depreciation typically available on amounts above the §179 cap. The deduction is available whether the equipment is purchased outright or financed — financing does not change the tax treatment of the asset.
In practice this means a financed equipment purchase can throw off a tax deduction in year one that is many multiples of the first year’s loan payments. That can materially change the after-tax cost of the equipment versus paying cash or leasing.
Two caveats sit on top of that benefit and both matter:
- The deduction only helps if there is taxable income to absorb it. A break-even or money-losing year cannot use the deduction the way a profitable one can. The §179 expense can sometimes be carried forward, but the immediate cash benefit assumes there is tax to offset right now.
- Limits change yearly. The §179 annual cap and the phase-out threshold above which the deduction begins to shrink both adjust for inflation each year. Confirm the current-year figures with a CPA against IRS Publication 946 before relying on the deduction in a financing decision — this guide is general education, not a substitute for tax advice.
Who equipment financing fits
- Businesses making a multi-year capital equipment purchase — trucks, machinery, restaurant equipment, medical or dental equipment, manufacturing tools
- Owners who want to preserve working capital and finance the equipment over time rather than pay cash upfront
- Borrowers whose credit profile would not qualify them for an unsecured loan but who are buying an asset that itself secures the financing
- Businesses planning to claim Section 179 or bonus depreciation, with enough taxable income that year to actually use the deduction
When equipment financing is the wrong choice
Equipment loans solve a real problem cleanly, but they are not the right tool when:
- The equipment depreciates or becomes obsolete faster than the loan term — being stuck on a 5-year loan against tech that is replaced in 2 to 3 years is a real and common failure mode
- Leasing actually fits better — heavy obsolescence risk, a short useful period, or a deliberate plan to upgrade frequently usually favors a lease over a purchase loan
- The real need is general working capital and an equipment loan is being forced as a workaround — financing the wrong instrument for the wrong purpose distorts both the deal and the books
- The business has no taxable income to offset that year, so the Section 179 or bonus depreciation case for buying over leasing collapses
- The equipment is highly specialized and the lender requires additional outside collateral on top of the equipment itself, eliminating the asset-secured advantage
How PMF fits in
Premium Merchant Funding, which publishes this site, arranges equipment financing alongside its other commercial finance products and works across multiple equipment lenders and lease programs. If equipment financing is the right tool for the purchase you are making, PMF can help place it — and if leasing, a working-capital product, or an SBA loan actually fits better given your situation, that is the conversation worth having first.