Quick overview

Equipment financing provides a way for businesses to acquire machinery, vehicles, computers, and other capital assets without paying the full purchase price up front. Lenders or lessors evaluate the equipment, the business’s credit and cash flow, and then offer loan or lease terms that match the asset’s useful life and the borrower’s revenue patterns.

How equipment loans and leases are structured

  • Loan (purchase financing): The lender advances funds to buy the equipment. The business owns the asset and repays principal plus interest over a set term. The equipment commonly serves as collateral.
  • Lease: A lessor owns the equipment and grants the business the right to use it for a term in exchange for payments. End-of-term options can include purchase, renewal, or return.

For a deeper comparison of ownership and payment trade-offs, see our guide on Equipment Loans vs Equipment Leasing: Which Suits Your Business?.

Key elements lenders consider

  • Credit history and business cash flow
  • Time in business and industry risk
  • Equipment type, age, and resale value (important when equipment is collateral)
  • Down payment or residual value requirements

See how lenders value collateral in detail in our piece on How Lenders Value Equipment as Collateral for Business Loans.

Structuring repayment to match your business

Align term length with the equipment’s useful life and your revenue cycle: shorter useful life generally means shorter loan terms; durable assets can carry longer terms. Options to structure payments:

  • Level monthly payments (most common)
  • Seasonal or stepped payments (higher payments during peak revenue months)
  • Balloon at maturity to lower periodic payments but require a larger final payment

Example: A contractor structures a five-year loan so payments ramp up after a seasonal peak, avoiding cash-flow strain in off months.

Lease vs loan: when to choose which

  • Choose a loan when you want ownership, potential tax depreciation, and control over disposition. Loans may require higher monthly payments but build equity.
  • Choose a lease when you prefer lower up-front cost, easier upgrades, or to keep equipment off the balance sheet (depending on lease type).

For different financing structures — including sale-leasebacks and hybrid deals — read: Equipment Financing Structures: Loans, Leases, and Sale‑Leasebacks.

Tax and accounting considerations

Tax treatment can affect the economics of a deal. Depreciation rules and immediate expensing provisions (for example, rules found in IRS guidance on depreciable property) may allow faster write-offs for purchased equipment; leases are typically deducted as an operating expense. Check IRS Publication 946 for current guidance and consult a tax advisor to apply rules to your situation (IRS: https://www.irs.gov/pub/irs-pdf/p946.pdf).

Eligibility, rates, and collateral

Smaller firms or startups may face higher rates or require personal guarantees. Lenders price deals based on business risk, the expected resale value of the equipment, and the borrower’s cash flow. It’s common to see financing that covers 80–100% of the equipment cost, but terms vary by lender and asset.

The Consumer Financial Protection Bureau provides resources on small-business credit practices and borrower protections (CFPB: https://www.consumerfinance.gov).

Practical tips from practice

  • Shop multiple lenders and ask for detailed cost schedules (APR, fees, prepayment penalties).
  • Match the term to the asset life and your revenue cycles — not the vendor’s standard offer.
  • Consider residual value and buyout terms in leases.
  • Insure the equipment and budget for maintenance; lenders often require proof of insurance.

Common mistakes to avoid

  • Ignoring total cost (fees, insurance, maintenance, and end-of-term charges).
  • Choosing a term too long, which can increase interest paid even if payments look affordable.
  • Overlooking covenants or cross-default provisions in complex financing agreements.

Short checklist before signing

  • Confirm ownership and title language
  • Verify insurance and maintenance responsibilities
  • Compare total cost (APR and fees) across offers
  • Ask about prepayment penalties and end-of-term options

Professional disclaimer

This article is educational and not individualized financial or tax advice. For tax treatment and accounting implications, consult a licensed CPA or tax attorney. For deal structuring, talk with a lender or commercial finance adviser familiar with your industry.

Sources and further reading