Quick answer

Equipment financing ties the loan to a specific asset (the equipment) and often offers easier approval, lower interest, and tax-friendly treatment because the asset serves as collateral. A term loan gives a lump sum for general business uses, offering flexibility at the cost of stricter underwriting and sometimes higher interest if unsecured. Both can be valuable; pick the one that matches your use of funds, cash flow profile, and balance-sheet goals.

Side-by-side: how they differ

  • Collateral: Equipment financing is typically secured by the equipment. Term loans can be unsecured or secured by business assets (accounts receivable, inventory, or a blanket lien).
  • Use of proceeds: Equipment financing must be used to buy or lease equipment. Term loans are more flexible — inventory, marketing, payroll, or multiple capital needs.
  • Underwriting: Lenders focus on the equipment value and useful life for equipment financing. Term loan underwriters emphasize cash flow, credit history, and business performance.
  • Approval speed: Equipment financing can close faster because collateral reduces lender risk. Term loans require more documentation and may take longer.
  • Risk: If you default on equipment financing, the lender can repossess the asset; term loan defaults expose broader business assets to collection if secured.

Typical loan structures and terms

  • Equipment financing: amortization usually matches the equipment’s expected useful life (commonly 2–7 years). Options include equipment loans (you own the asset) or equipment leases (you make payments and may return, buy out, or continue leasing). See our detailed primer on leasing vs loans for equipment for a deeper comparison Equipment Financing 101: Leasing vs. Loaning for Businesses.
  • Term loans: terms usually range from 1–10 years, depending on purpose and size. Short-term installments and longer-term amortizing loans are both common. Underwriting often needs 2+ years of financials for best pricing.

Tax and accounting considerations

  • Depreciation vs expense: Financed equipment that you own is generally capitalized and depreciated over its useful life, subject to tax rules like Section 179 and bonus depreciation where eligible (see IRS guidance on business deductions) (IRS — Deducting business expenses).
  • Interest deductibility: Interest on business loans (including term loans and equipment loans) is typically deductible as a business expense when the debt is ordinary and necessary (IRS guidance) (IRS — Business Interest Expense Limits). Avoid taking tax positions without a tax advisor — the mechanics and limits vary by year and by taxpayer.
  • Lease accounting: Operating vs capital lease treatment affects whether the asset and liability appear on your balance sheet. Recent accounting standards (ASC 842/IFRS 16 analogs) require many leases to show on the balance sheet; discuss specifics with your accountant.

Who should consider equipment financing?

  • Businesses that need a specific machine, vehicle, or technology and want the lender to accept the asset as primary collateral.
  • Firms with limited credit history but adequate business plans and a clear revenue path tied to the equipment’s use.
  • Companies wanting to match payments to the productive life of the asset, preserving working capital.

Who should consider a term loan?

  • Businesses that need flexibility to spend funds across multiple categories (inventory, renovations, hiring, marketing).
  • Companies with established revenues and credit history that can qualify for lower rates on unsecured or secured term loans.
  • Borrowers who want fixed repayments and clear amortization to plan cash flow.

Practical examples (realistic, anonymized)

  • Manufacturer needs a $200,000 CNC machine. Equipment financing offered 5-year term with the CNC as collateral; approval relied on the machine’s value and expected service life. Monthly payments matched production schedules, letting the company avoid dipping into cash reserves.
  • A growing retailer needs $150,000 to renovate a store and buy inventory. The owner took a 5-year term loan to cover both uses. Underwriting evaluated store-level sales, projections, and owner credit history; the flexibility produced faster sales growth.

How lenders underwrite each option

  • Equipment lenders examine the asset: make, model, resale value, and usable life. They may request an invoice, equipment schedule, or vendor information. Some lenders offer vendor financing programs that simplify purchase and installation.
  • Term lenders review cash flow coverage ratios (e.g., debt service coverage), business tax returns, bank statements, and personal guarantees. Alternative lenders may use bank deposits and real-time cash flow data for faster decisions.

Pros and cons (quick list)

Equipment financing pros:

  • Easier approval for asset-backed loans
  • Lower rates or longer terms tied to an asset’s life
  • Possible preservation of working capital
    Equipment financing cons:
  • Asset repossession risk on default
  • Limited to equipment purchases

Term loan pros:

  • Flexible use of funds
  • Simpler repayment schedule for diverse needs
    Term loan cons:
  • Possibly stricter underwriting
  • May require additional collateral or personal guarantees

Choosing between them: a decision checklist

  1. Define the intended use. If funds are strictly for equipment, equipment financing often fits best.
  2. Run cash flow scenarios. Use your projected monthly cash flow to test payment affordability under both options.
  3. Compare total loan costs. Look at APR, fees, prepayment penalties, and insurance requirements.
  4. Consider balance-sheet impact. Do you want the asset capitalized or off-balance-sheet via operating lease?
  5. Negotiate terms. Ask about end-of-term options on equipment financing: purchase price, fair market value buyout, or upgrade options.

Common mistakes I see in practice

  • Failing to match loan term to equipment life, leading to payments that extend past the asset’s useful life.
  • Overlooking additional costs: maintenance, warranties, taxes, insurance, and repossession fees.
  • Not checking how the loan or lease affects tax deductions and cash flow in the first year.

Applying: what lenders will typically ask for

  • Business formation documents and ownership details
  • Recent business bank statements (usually 3–12 months)
  • Tax returns and profit-and-loss statements
  • Equipment invoices or quotes (for equipment financing)
  • Personal credit history and guarantees for small businesses

Resources and internal reading

Frequently asked questions (short answers)

  • Can I refinance equipment financing? Yes — lenders refinance existing equipment loans if the asset retains value and the borrower’s credit profile permits refinancing.
  • Does equipment financing speed up approval? Often yes: when the lender values the collateral, approval can be faster than a general-purpose term loan.
  • Are loan interest and depreciation tax-deductible? Interest is generally deductible as a business expense and equipment depreciation or expensing may be available; consult the IRS guidance and your tax advisor (IRS — Deducting business expenses).

Professional disclaimer

This article is educational and not individualized financial advice. Lenders vary in underwriting and borrower protections. For tax decisions, consult a CPA or tax attorney because depreciation rules, Section 179, and bonus depreciation limits change and depend on your facts.

Authoritative sources

(Author: finance professional with 15+ years advising small and mid-sized businesses. For tailored guidance, schedule a consultation with a licensed advisor.)