Equipment Financing 101: Everything You Need to Know

Introduction

Every business needs equipment to operate. Whether you're a restaurant needing a new oven, a construction company buying an excavator, or a medical practice acquiring diagnostic equipment, financing helps you get what you need without depleting cash.

Types of Equipment Financing

Equipment Loans

How it works:

• ●Borrow money to purchase equipment
• ●Equipment serves as collateral
• ●Own equipment after loan payoff

Best for:

• ●Equipment with long useful life
• ●Items you want to own
• ●Tax deduction benefits important

Typical terms:

• ●2-7 year terms
• ●6-25% interest rates
• ●0-20% down payment

Equipment Leases

Operating Lease:

• ●Rent equipment for a period
• ●Return at end of lease
• ●Lower monthly payments
• ●Best for: Equipment that becomes obsolete

Capital Lease (Finance Lease):

• ●Lease to own
• ●$1 buyout at end typical
• ●Treated as ownership for accounting
• ●Best for: Equipment you want to own eventually

Fair Market Value Lease:

• ●Option to buy at FMV at end
• ●Lower payments than capital lease
• ●Flexibility at lease end

Comparing Loans vs Leases

What Can Be Financed?

Almost any business equipment:

• ●Construction: Excavators, trucks, tools
• ●Restaurant: Ovens, refrigeration, POS
• ●Medical: Imaging, diagnostic, furniture
• ●Manufacturing: Machinery, robots, conveyors
• ●Technology: Computers, servers, software
• ●Transportation: Trucks, trailers, fleet vehicles
• ●Office: Furniture, copiers, phone systems

Qualification Requirements

Minimum Typical Requirements

• ●6+ months in business
• ●600+ credit score
• ●Equipment quote or invoice
• ●Business bank account

What Strengthens Applications

• ●Longer time in business
• ●Higher credit score
• ●Larger down payment
• ●Strong cash flow
• ●Equipment with good resale value

The Application Process

Step 1: Get Equipment Quote

Obtain detailed quote including:

• ●Exact equipment specifications
• ●Total price
• ●Delivery/installation costs
• ●Warranty information

Step 2: Gather Documents

Typically needed:

• ●Business bank statements (3-6 months)
• ●Equipment quote/invoice
• ●Driver's license
• ●Business information

Step 3: Apply

Options:

• ●Direct lender
• ●Equipment dealer financing
• ●Bank or credit union
• ●Online equipment financing company

Step 4: Review Offers

Compare:

• ●Interest rate/factor
• ●Term length
• ●Down payment required
• ●Early payoff options
• ●Any fees

Step 5: Close and Fund

• ●Sign documents
• ●Make down payment (if required)
• ●Vendor receives payment
• ●Take delivery of equipment

Tax Benefits

Section 179 Deduction

Deduct full purchase price of qualifying equipment in the year purchased.

2024 Limits:

• ●Maximum deduction: $1,160,000
• ●Phase-out begins: $2,890,000

Bonus Depreciation

Additional first-year depreciation:

• ●60% in 2024
• ●Phases down annually

Lease Payment Deduction

Monthly lease payments may be fully deductible as operating expenses.

Always consult a tax professional for your specific situation.

Choosing the Right Option

Choose a Loan When:

• ●Equipment has long useful life
• ●You want to build equity
• ●Tax deductions matter
• ●You have down payment available
• ●Lower total cost is priority

Choose a Lease When:

• ●Equipment becomes obsolete quickly
• ●You want lower monthly payments
• ●You prefer flexibility
• ●You want to preserve capital
• ●Off-balance-sheet matters

Red Flags to Avoid

• ●❌ Unclear total cost
• ●❌ Large upfront fees
• ●❌ Automatic rollover clauses
• ●❌ Excessive early termination penalties
• ●❌ Personal guarantees beyond reasonable

Conclusion

Equipment financing is a powerful tool for business growth. Whether you choose a loan or lease depends on your specific situation, but either can help you acquire the equipment you need while preserving working capital.