Equipment Financing: What It Costs, How It Works, and When to Use It

What Equipment Financing Is (and Is Not)

Equipment financing is a loan or lease used to purchase business equipment, where the equipment itself serves as collateral. Because the lender has a secured interest in the asset, approval rates are higher and rates are often lower than unsecured business loans.

Equipment loan: You own the equipment at the end of the term. The loan is collateralized by the equipment's value.

Equipment lease: You use the equipment for a fixed term and return or buy it at the end. Preserves cash, but you build no equity.

SBA 504: The best-rate option for major equipment purchases over $150K. Requires a Certified Development Company (CDC) as the second lender. Fixed rate on 40% of the project. Best for equipment with long useful life (10+ years).

Equipment financing does NOT cover repairs, consumables, or software-only purchases (lenders require a hard asset as collateral).

Equipment Financing Rates: What to Expect

Rates depend on your credit profile, the equipment type, and the lender.

Conventional equipment loan: 6–18% APR for borrowers with 680+ credit score and 2+ years in business.

SBA 504 CDC portion: Fixed rate set monthly by the SBA, typically 5.5–7% (verify current rate at sba.gov). This is the lowest rate available for major equipment purchases.

Online/alternative lenders: 15–30% APR. Faster approval, lower documentation - but meaningfully more expensive. Appropriate for smaller purchases or borrowers who can't qualify for bank financing.

Factors that move your rate higher: Credit score below 680, less than 2 years in business, specialized or "soft" equipment (technology, specialized manufacturing), short lender-held useful life.

Factors that move your rate lower: High credit score (720+), long business history, standard/widely-resaleable equipment (vehicles, construction, medical), strong DSCR.

Equipment Financing vs. SBA 7(a) vs. SBA 504

Three loan structures that overlap for large equipment purchases:

Conventional equipment loan - Best for: Equipment under $150K, businesses that need faster approval - Down payment: 10–20% - Rate: 6–18% - Term: 3–7 years

SBA 7(a) - Best for: Equipment bundled with working capital or other business needs - Down payment: 10% minimum - Rate: WSJ Prime + 2.75–3.5% (variable) - Max: $5M - Term: Up to 10 years for equipment

SBA 504 - Best for: Major equipment over $150K, particularly with long useful life (10+ years) - Down payment: 10% (standard), 15% (for startup businesses) - Rate: Fixed on 40% of project (set by SBA); conventional bank rate on 50% - Max: $5.5M per project, $5M SBA portion - Term: 10 or 20 years

The 504 saves you interest over time on large purchases. For a $500K equipment purchase at current rates, the 504 structure can save $30K–$60K in interest vs. a conventional loan over the full term.

What Lenders Look At for Equipment Financing

Equipment lenders underwrite the asset and the borrower:

The equipment: Age, condition, remaining useful life, resale market. A 2026 commercial refrigeration unit is strong collateral. A 10-year-old specialized CNC machine with few secondary buyers is weak collateral.

The borrower: Personal credit (minimum 650 for most lenders, 680+ for best rates), time in business (2+ years preferred), DSCR. Equipment lenders often use a simplified DSCR: annual net income ÷ annual debt service ≥ 1.25x.

The business: Revenue history (bank statements or tax returns), industry risk, existing debt load.

Down payment: 10–20% is standard. Lenders rarely finance 100% of equipment value unless it's highly liquid (like standard vehicles or yellow iron construction equipment).

Equipment lenders will also check the UCC filing registry for existing liens on the equipment. If the equipment you're buying has existing liens, you'll need those satisfied at closing.

Frequently Asked Questions

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