Equipment Financing for Small Business
How Equipment Financing Works
Equipment financing is a straightforward structure. You identify the equipment you need, get a quote from the vendor, and apply for financing through a bank, online lender, or equipment financing company. The lender evaluates your creditworthiness and the equipment's value, then provides funds to purchase the equipment. You make fixed monthly payments over the loan term while using the equipment in your business. The lender holds a lien on the equipment until you complete all payments, at which point you own it outright.
Loan amounts range from $5,000 to $5 million depending on the lender and equipment type. Down payments range from 0% to 20% of the equipment cost, with most lenders requiring 10% to 15% for new equipment. Used equipment typically requires a higher down payment because its resale value (the lender's safety net) is lower and less predictable than new equipment.
Loan terms are structured to match the expected useful life of the equipment. A delivery van expected to last 7 years gets a 5 to 7-year loan. Manufacturing equipment expected to last 10 years gets a 7 to 10-year loan. Computers and technology equipment with a 3 to 5-year useful life gets a 3 to 5-year loan. This matching ensures that you are not still making payments on equipment that is worn out or obsolete, and it keeps monthly payments reasonable relative to the value the equipment generates.
Equipment Loan vs Equipment Lease
A loan and a lease both put equipment in your hands, but the financial mechanics, ownership implications, and tax treatment differ significantly.
With an equipment loan, you own the equipment from day one (subject to the lender's lien). You claim depreciation on the asset, which reduces your taxable income. When the loan is paid off, you own the equipment free and clear with no additional payments. If the equipment has residual value after the loan term, that value is yours. If it breaks or becomes obsolete, the loss is yours too. Equipment loans work best when the equipment has a long useful life, holds its value well, or is critical to your operations for the foreseeable future.
With an equipment lease, the leasing company owns the equipment and you make monthly payments for the right to use it. At the end of the lease term, you typically have three options: return the equipment, purchase it at fair market value (or a predetermined residual value), or renew the lease. Lease payments are fully deductible as a business expense in the year they are paid. Leases work best for equipment that becomes obsolete quickly (technology), equipment you may only need temporarily, or when you want to preserve cash and borrowing capacity for other purposes.
The cost comparison often favors loans for long-term use. A $50,000 piece of equipment financed with a loan at 8% APR over 5 years costs $60,830 in total payments, and you own a piece of equipment that might be worth $15,000 to $25,000 at the end. The same equipment on a fair-market-value lease at equivalent terms costs roughly $55,000 to $65,000 in total payments, and you own nothing unless you make an additional purchase payment. However, if the equipment will be obsolete in 3 years and you would need to replace it anyway, the lease's flexibility to return and upgrade becomes more valuable than ownership.
Interest Rates and Cost Factors
Equipment financing rates range from 4% to 20% APR, influenced by several factors. Your personal credit score is the biggest single factor. Borrowers with 720+ scores routinely see rates of 4% to 8%. Scores between 650 and 719 typically get 8% to 14%. Scores below 650 land in the 14% to 20% range or may need to look at alternative financing structures.
The equipment type and condition also affect rates. New equipment from established manufacturers gets the best rates because its value is predictable and resale markets are liquid. Used equipment commands higher rates because its residual value is less certain. Specialized or custom equipment that has a limited resale market may require higher rates or larger down payments because the lender cannot easily sell it if you default.
Business age and financial strength influence rates as well. Businesses with 3+ years of profitable operation get better terms than startups. Strong cash flow and low existing debt signal lower risk. Some equipment lenders offer "startup-friendly" programs for businesses under 2 years old, but rates are typically 5 to 8 percentage points higher than their standard programs.
Additional costs to account for include origination fees (typically 1% to 3% of the loan amount), documentation fees ($150 to $500 one-time), and in some cases, annual service fees. Always ask for the total cost of the loan including all fees before committing, and compare the fully loaded cost across multiple providers.
What Equipment Qualifies
Most tangible business assets qualify for equipment financing. Common categories include commercial vehicles (delivery vans, trucks, forklifts), manufacturing and production equipment, restaurant and food service equipment, construction equipment, medical and dental equipment, IT hardware (servers, computers, networking equipment), office furniture and fixtures, point-of-sale systems, and agricultural equipment.
Software financing has become more common as business software costs have increased. Some lenders will finance enterprise software licenses, especially multi-year contracts with significant upfront costs. Cloud software subscriptions generally do not qualify because there is no tangible asset to serve as collateral, but on-premise software installations sometimes do.
Used equipment qualifies but requires the lender to assess its current fair market value and remaining useful life. Expect to provide detailed information about the equipment's age, condition, maintenance history, and the purchase price. Some lenders require a professional appraisal for used equipment above a certain value threshold (commonly $50,000 to $100,000).
Top Equipment Financing Providers
National Funding offers equipment financing from $10,000 to $150,000 with terms of 2 to 5 years. They accept businesses with as little as 6 months in operation and credit scores as low as 600. Application decisions typically come within 24 hours. National Funding is a good option for newer businesses or those with imperfect credit who cannot qualify at banks.
Balboa Capital provides equipment loans from $5,000 to $500,000 with terms of 1 to 5 years. They work with startups and established businesses, with rates starting around 5.99% for well-qualified borrowers. Balboa covers a wide range of equipment types and offers same-day approval with funding in 24 to 48 hours.
Crest Capital finances equipment from $5,000 to $500,000 with terms up to 7 years. They offer both loans and leases, letting you choose the structure that best fits your tax and cash flow situation. Crest Capital requires a 650+ credit score and at least 2 years in business for their best rates.
SBA 504 loans can finance major equipment purchases at rates of 6% to 7% fixed for 10 years, with just 10% down. The 504 program is the cheapest equipment financing available, but it requires significant paperwork, 30 to 90 days for approval, and the equipment must cost enough to justify the SBA process (practically, this means $100,000+). For large equipment purchases, the rate savings over the loan term can be tens of thousands of dollars compared to other options.
Equipment vendor financing is offered by many major equipment manufacturers and dealers. Companies like Caterpillar Financial, John Deere Financial, and HP Financial Services provide financing specific to their products. Vendor financing is convenient because you handle the purchase and financing in one transaction, but always compare the vendor's rate to independent lenders, as vendor financing is not always the cheapest option.
Section 179 Tax Deduction
Section 179 of the IRS tax code allows businesses to deduct the full purchase price of qualifying equipment in the year it is purchased, rather than depreciating it over several years. For 2026, the Section 179 deduction limit is $1.22 million with a spending cap of $3.05 million (above which the deduction begins to phase out). This applies to new and used equipment, as well as certain software.
The tax benefit can significantly reduce the effective cost of equipment financing. If your business is in the 25% tax bracket and you purchase $100,000 in qualifying equipment, the Section 179 deduction saves you $25,000 in taxes. If you financed that equipment at 8% APR over 5 years, your total interest cost is approximately $21,660. The tax savings more than offset the financing cost, effectively making the financing free in this scenario.
Bonus depreciation provides an additional deduction for new equipment beyond the Section 179 limit, currently at 60% for 2026 (down from 100% in 2022 and 80% in 2023, declining by 20% per year). Consult your accountant about the optimal combination of Section 179 and bonus depreciation for your specific situation, as the best strategy depends on your income level, equipment cost, and long-term tax planning.