Quick overview

Equipment financing lets a business acquire machinery, vehicles, computers, furniture, and other tangible assets by spreading the cost over time. Instead of paying the full purchase price, you make scheduled payments under a loan or lease. Lenders and lessors underwrite on the collateral value of the asset and the borrower’s business cash flow, so financing is often available even for businesses with limited credit history.

I’ve worked with small businesses across construction, retail, and service industries and routinely see two core benefits: preserved working capital (so owners can continue to buy inventory, hire staff, or invest in marketing) and predictable monthly costs that align with the asset’s productive life.

Sources: IRS guidance on business property and deductions and general consumer protections from the Consumer Financial Protection Bureau (CFPB) provide context for tax and borrower protections (see links below).

How equipment financing works — loans vs. leases

There are two primary structures:

  • Equipment loans: You borrow funds to buy the asset. The business typically owns the equipment from day one (or after a short title process) and repays principal plus interest. The asset acts as collateral; if you default the lender can repossess it.

  • Equipment leases: A leasing company purchases the equipment and lets you use it for an agreed term in exchange for payments. Leases range from short-term operating leases to capital/finance leases that resemble ownership. End-of-term options may include returning the equipment, renewing the lease, or purchasing the asset for a residual price.

Which to choose depends on cash flow, tax treatment, and whether you want eventual ownership.

Who qualifies and what lenders look at

Eligibility standards vary but common lender requirements include:

  • Time in business and revenue history — many lenders prefer at least 6–12 months of operation, though startup-friendly lenders exist.
  • Business and owner credit profiles — stronger credit improves rates and terms.
  • Debt service coverage — lenders evaluate whether cash flow can cover payments.
  • The asset itself — equipment with a clear resale market and long useful life is easier to finance.

Document checklist I frequently request from clients:

  • Business tax returns (1–3 years when available)
  • Recent financial statements (profit & loss, balance sheet)
  • Bank statements (typically 3–6 months)
  • Equipment invoice or quote
  • Personal guarantor information (if required)

Tax and accounting considerations

Tax treatment depends on whether you purchase or lease and how you classify the arrangement. Common points:

  • Ownership through a purchase or a capital/finance lease usually means you can claim depreciation and potentially Section 179 or bonus depreciation when eligible. For authoritative guidance on Section 179, see the FinHelp page on the Section 179 Deduction and the IRS Section 179 information (IRS link below).

  • Operating leases typically allow you to deduct lease payments as a business expense; you do not depreciate an asset you don’t own.

  • Tax rules and dollar limits for deductions and bonus depreciation can change year to year; verify current IRS rules before making a decision.

In practice, I advise clients to run a simple after-tax cash flow model comparing: (a) monthly lease payments, (b) loan payments plus expected depreciation/tax deduction benefits, and (c) total cost over the asset’s useful life. That concrete comparison often resolves which structure is best.

Authoritative references: IRS (business property rules and Section 179) and CFPB guidance on small-business lending protections.

Common financing options and what they cost (conceptually)

  • Bank equipment loans: Often best for healthy businesses with good credit. Can have competitive pricing and longer terms.
  • Equipment finance companies: More flexible on credit and can finance used equipment; pricing varies.
  • Vendor financing: Equipment manufacturers or dealers often offer in-house financing or partner programs — convenient but compare pricing.
  • Leasing companies: Provide operating and capital leases with varying purchase options.

Costs depend on credit, term, the asset’s depreciation, and market rates. Always compare total cost of financing (total payments + fees) rather than just monthly payment.

See FinHelp’s comparison pages for deeper dives: Equipment Financing vs Leasing: Tax and Cash Flow Considerations and Equipment Financing Explained: Loans for Machinery and Tools.

Real-world examples and decision factors

Example 1 — Vehicle for a trades contractor: A medium-sized contractor needed a service van but preferred to keep cash for payroll. A five-year equipment loan let the business own the van and claim depreciation; the owner used a portion of the depreciation and interest expense to reduce taxable income, while spreading cash outflows.

Example 2 — Specialized landscaping mower: A small landscaping firm leased high-end mowing equipment to stay current with technology and avoid maintenance surprises. The lower monthly outlay preserved working capital and provided an end-of-term purchase option.

Key decision factors I use with clients:

  • How long will you use the equipment? If short-term use is expected, leasing often makes more sense.
  • Is asset ownership strategically important? Ownership may increase resale value and support loan collateral for future borrowing.
  • Does the equipment have a reliable resale market? This affects both lease residuals and loan repossession value.

Negotiation tips and practical strategies

  • Shop multiple lenders and get term sheets in writing so you can compare APR, fees, and covenants.
  • Negotiate residual values and end-of-term purchase price on leases.
  • Ask about all fees upfront: origination, documentation, prepayment penalties, early termination, and late fees.
  • Consider a balloon payment vs. full amortization — some borrowers choose a lower monthly payment with a small final balloon but know the refinancing or cash plan to cover it.
  • Preserve cash: prioritize financing that keeps 3–6 months of operating liquidity on hand.

Common mistakes small business owners make

  • Approving the first offer without comparison: Rates, fees, and covenants can vary widely.
  • Ignoring the total cost of ownership: Maintenance, insurance, and downtime can change the economics.
  • Over-leveraging equipment that rapidly becomes obsolete: For technology or specialty tools, shorter leases can be safer.
  • Forgetting tax implications: Misclassifying leases or failing to claim available deductions reduces after-tax benefit.

Practical checklist before you sign

  1. Confirm the equipment model, specs, and seller.
  2. Get at least three financing quotes (bank, finance company, vendor).
  3. Compare APR, fees, and total cost over the term.
  4. Check lease end options and residual value formulas.
  5. Verify tax treatment with your accountant — confirm eligibility for Section 179 or other deductions.
  6. Read the contract for default triggers, repossession language, insurance requirements, and early payoff terms.

FAQs (short answers)

  • Can I finance used equipment? Yes. Lenders frequently finance quality used equipment; terms can differ from new equipment financing.
  • Are monthly lease payments deductible? Generally, yes for operating leases; check with tax counsel for specific rules.
  • How do I improve approval odds? Improve business cash flow statements, reduce outstanding debts, and build strong documentation. A personal guarantee or collateral improves lender confidence.

Helpful links and resources

Professional disclaimer: This article is educational and not personalized financial or tax advice. Rules for tax deductions, depreciation, and leasing classification change over time and the best option depends on your business’s facts. Consult a qualified accountant or financial advisor before finalizing any financing decision.

In my practice, careful comparison and a short cash-flow model usually reveal the best structure. Equipment financing—used thoughtfully—can be a powerful tool to grow operations without sacrificing financial flexibility.