Equipment financing basics

Equipment financing is money borrowed specifically to buy business equipment, where the equipment itself serves as the collateral. Because the lender can repossess the asset if you default, these deals are usually easier to qualify for than unsecured loans, and they often finance up to 100 percent of the purchase price.

The term is typically matched to the useful life of the equipment, so you are not still paying for a machine years after it has worn out. Rates depend on your credit, the type of equipment, and whether it is new or used, since a hard asset that holds value is easier to lend against than specialized or soft-cost items.

An equipment loan or equipment finance agreement means you own the asset outright once it is paid off, and it goes on your books as an asset with the loan as a liability.

A lease splits into two common shapes. A dollar-buyout lease works like a loan: you make payments and own the equipment for a token amount at the end. A fair-market-value lease has lower payments, and at the end you either return the equipment or buy it at its then-current value, which suits gear that becomes obsolete quickly, like technology.

Lease if the equipment goes obsolete fast, if you want lower monthly payments, or if you would rather upgrade at the end of the term than own aging gear. Buy or take a loan if the equipment has a long useful life and holds value, because ownership is cheaper over the life of a durable asset.

Section 179 of the tax code lets a business deduct the full purchase price of qualifying equipment in the year it is placed in service, rather than depreciating it slowly over many years. There is an annual dollar cap and a phase-out threshold that the IRS adjusts each year, so check the current-year limit and confirm the specifics with your accountant.

Bonus depreciation is a related provision that can apply on top of or instead of Section 179, depending on the year and the asset. The point for planning is simple: financing equipment does not disqualify you from these deductions, so the after-tax cost of the purchase is often lower than the sticker suggests.

Lenders will want a quote or invoice for the specific equipment, basic business financials, and details on time in business and revenue. For newer businesses or larger purchases, expect a personal guarantee. Because the asset backs the deal, even businesses with thinner credit can often get approved, which makes equipment financing a useful way to build a repayment track record that helps you qualify for larger, unsecured credit later.