Overview

When you need to buy machinery or vehicles, the financing structure determines cost, risk, tax treatment, and operational flexibility. Equipment financing ties the lender’s security and underwriting to the asset itself; term loans provide a lump-sum that can be used for many purposes and are repaid on a fixed schedule. In my practice I’ve seen companies lower effective cost and preserve cash by matching loan length and payments to equipment life.

How the two options differ (quick comparison)

  • Collateral: Equipment financing is usually secured by the equipment; term loans may be secured by business assets or unsecured.
  • Underwriting: Equipment deals often underwrite based on equipment value and residuals; term loans rely more on cash flow, credit history, and business balance sheet.
  • Term & amortization: Equipment terms commonly match useful life (shorter amortization or lease terms). Term loans often have fixed amortization schedules that may not match asset depreciation.
  • Use of proceeds: Equipment financing funds the asset purchase specifically; term loans allow broader uses (inventory, payroll, expansion).
  • Tax treatment: Equipment-financed assets may be eligible for Section 179 expensing or bonus depreciation; consult the IRS for current rules (see IRS Section 179) and your tax advisor.

Structuring the purchase: practical steps

  1. Define the business objective
  • Is the asset core to production or easy to replace? Match ownership desire (buy vs lease) to operational needs.
  1. Compare total cost, not just the rate
  • Evaluate interest rate, term length, fees, down payment, maintenance obligations, and end-of-term costs. A lower nominal rate can still cost more if the term, fees, or balloon payments are unfavorable.
  1. Align term to useful life
  • For owned equipment, choose a loan term close to the asset’s useful life so payments reflect value and you avoid long-term negative equity.
  1. Consider tax and accounting effects
  • Equipment financing often allows you to capitalize the asset and claim depreciation (including Section 179 or bonus depreciation where applicable). For current IRS guidance, see the Section 179 page (IRS). Always run numbers with your accountant.
  1. Protect cash flow
  • If preserving working capital matters, consider low/no down payment equipment programs or operating leases; for short-lived assets consider shorter amortization.
  1. Negotiate collateral and guarantees
  • Lenders commonly require a UCC-1 filing on equipment and may ask for personal guarantees for small or early-stage businesses. Understand what triggers cross-defaults with other loans.

Underwriting and pricing: what lenders look at

  • Equipment Financing: Lenders focus on equipment age, type, resale market, and voluntary down payment; newer, fungible equipment gets better terms.
  • Term Loans: Underwriting centers on historical and projected cash flow, credit score, business financials, and overall leverage.

Real-world example (short)

A construction contractor needed a $200,000 excavator. Equipment financing covered 90% of purchase with a 5-year term closely matching the machine’s productive life and included a modest residual option at term end. The structure lowered upfront cash needs and produced payments that the project pipeline covered.

Common mistakes to avoid

  • Using a long-term general term loan to buy quickly depreciating equipment (creates negative equity).
  • Overlooking end-of-term costs—purchase options, residuals, or balloon payments can change total cost dramatically.
  • Ignoring tax timing—Section 179 expensing or bonus depreciation affects cash taxes in the first year; timing varies by tax law.

When to choose each

  • Choose equipment financing when the asset’s resale market is strong, you want the lender to underwrite the asset, or you need a purchase structure that preserves cash.
  • Choose a term loan when you need flexibility in how you use funds, want to consolidate debt, or when the asset is a small part of a larger financing need.

Tools and next steps

  • Get competing quotes from equipment lenders and term-loan providers, and ask for an amortization schedule and all fees in writing.
  • Run a three-year cash-flow forecast that includes the new payment stream before signing.
  • Discuss tax treatment with your CPA (see IRS: Section 179) and check SBA guidance for small-business loan options.

Further reading

Authoritative sources

Professional note and disclaimer

In my 15+ years advising small businesses I find that the right structure usually balances tax benefits, cash-flow timing, and end-of-term flexibility. This article is educational and not personalized tax or legal advice; consult your CPA or attorney before finalizing financing arrangements.