Equipment Financing: How It Works, Costs and Who Qualifies

What equipment financing is, in plain terms #

You need a $40,000 CNC machine, a delivery van or a commercial oven. You don't have $40,000 sitting in the bank, or you'd rather keep that cash for payroll and inventory. Equipment financing lets you get the asset now and pay for it over time.

The key feature is collateral. The equipment secures the deal, and if you stop paying, the lender can repossess it. Because the lender has something concrete to fall back on, it can often approve deals that an unsecured loan would not cover.

There are two basic structures:

• An equipment loan. You borrow the purchase price, make regular payments, and own the equipment from day one. The lender usually holds a lien on it until the loan is paid.
• An equipment lease. You pay to use the equipment for a set term. At the end you may buy it, return it or renew. Leases can lower monthly payments, but you may not build ownership.

Because the machine backs the deal, equipment financing is often easier to get than a general business loan.

Equipment loan, lease or SBA loan: how the options compare #

Different tools fit different jobs. This table compares the common categories. Figures are general patterns, not quotes, and your actual terms depend on the lender, your file and the equipment.

A bank or SBA loan usually wins on price, and it is the right call if you can wait and your file is clean. An online equipment lender usually wins on speed. A merchant cash advance is not really equipment financing. It is a sales-based advance that can be used for almost anything, and it is expensive. Use it only if you understand the cost and have a clear plan to repay quickly.

Who it fits, and when a bank is the better choice #

Equipment financing fits owners who need a specific asset that will produce revenue or cut costs. A bakery buying an oven, a contractor buying a truck, a clinic buying imaging equipment and a manufacturer replacing a failed press are all typical cases.

It fits best when the equipment has real resale value and a useful life longer than the loan term. A machine that holds value is safer collateral than one that is obsolete in three years.

Bank financing is the slow default, and for an owner with a deadline it often fails on timing alone. But a bank is the better choice when:

• You can wait several weeks or more for a decision.
• You have two or more years of solid financial statements and strong credit.
• You can put money down and want the lowest possible total cost.
• The equipment is a large, long-life purchase where a few points of rate difference add up to real money.
• You already have a banking relationship that helps your application.

Go to an online equipment lender, or to our network of funding partners, when the machine is breaking down, a contract is waiting, a deadline is close, or your file is too new or too thin for a bank to approve in time. Speed has a price, and for many owners it is worth paying. The mistake is paying speed prices when you had time to wait for a bank.

What it really costs: rates, factor rates and APR #

Lenders quote cost in different ways, so two offers can look similar and cost very different amounts. Before you sign, get the cost in one unit you can compare: APR, the annual percentage rate.

Interest rates are the simplest. A 9% interest rate means you pay roughly 9% a year on the outstanding balance. Banks and SBA lenders usually quote this way.

Factor rates are common with online equipment lenders and merchant cash advances. A factor rate is a multiplier, not an annual rate. You multiply the amount borrowed by the factor to get the total you repay.

For example, borrow $10,000 at a 1.25 factor over 8 months (≈ 60–75% APR, depending on the payment schedule). The repayment is $12,500, which makes the cost $2,500. That looks modest until you account for time. Because you repay steadily, the average balance you owe is only a little over half the original amount, so the annual cost is far higher than 25%.

Never compare a factor rate to an interest rate as if they were the same thing. A 1.25 factor over 8 months (≈ 60–75% APR) is not a 25% rate. Ask every lender for the total repayment amount, the term and the payment schedule, then get the APR equivalent. A reputable funder will provide it without fuss.

Other costs to check:

• Origination or documentation fees, often a percentage of the amount financed.
• Prepayment terms. Some deals charge the full finance cost even if you pay early. Others give a reduction.
• Late fees and default terms.
• Buyout price on a lease. A $1 buyout and a 20% buyout are very different products.
• Insurance requirements. Lenders may require you to insure the equipment and name them as loss payee.

Startups, bad credit and no money down: what lenders look at #

This is where many owners get discouraged, so here is what lenders actually weigh.

Credit score. There is no universal minimum for equipment financing. Each lender sets its own criteria. Because the equipment secures the loan, some lenders will look past a modest score if the machine is strong collateral and your cash flow covers the payment. Expect a personal guarantee in most small business deals.

Time in business. Banks and SBA lenders typically want two years or more. Some online equipment lenders accept younger businesses, often when there is documented revenue, a signed customer contract, or strong personal credit behind the deal.

Cash flow. Lenders care most about whether your business can make the payment. They compare the monthly payment to your deposits or revenue. A new business with steady, documented sales can often qualify when one with no sales cannot.

Down payment. Some lenders offer no-money-down financing, especially on higher-quality equipment. Many ask for a down payment, for example 10–20% or more, particularly on used equipment or for weaker files. A down payment reduces the lender's risk and can improve your rate or approval odds.

Equipment type and age. New equipment from a known manufacturer is easier to finance. Used equipment is possible, but lenders often limit the amount and term based on the machine's age and expected life.

If you are a startup or have imperfect credit, you still have options. Bring a clear quote, a simple revenue summary and a plan for how the machine will make money. The clearer the link between the equipment and your income, the better your odds.

How to apply and what to have ready #

Preparation shortens the process and reduces surprises. Have these ready before you apply:

• The equipment quote or invoice, including make, model, year, price and the seller's name. Lenders need this to value the collateral.
• Business bank statements, usually the last three to six months.
• Business basics: legal name, EIN, date of formation, address and industry.
• Personal identification for each owner with a meaningful stake, often 20% or more.
• Financial statements and tax returns for a bank or SBA application. Have the last two years ready.
• A simple cash flow summary: monthly revenue, existing debt payments and the new payment you are considering.
• Proof of insurance or a plan to insure the equipment.

Then decide your timeline. If you need the machine in days, skip the bank and go to an online equipment lender. If you can wait six weeks and your file is strong, start with a bank and compare it against an online offer. Get at least two quotes and calculate the APR on each.

Before you sign, confirm the total repayment, the payment schedule, prepayment terms, the buyout price if you lease, and who owns the equipment during the term.

Can I get equipment financing with no money down? #

Sometimes. Some lenders finance 100% of the equipment cost, especially on new machines from established manufacturers and for borrowers with solid cash flow. Many others ask for a down payment, particularly on used equipment or for newer businesses. If you have no cash to put in, ask lenders directly whether they offer full financing and what it does to your rate and term.

Can a startup get equipment financing without two years of revenue? #

It depends on the lender and the deal. Banks and SBA loans usually expect a longer track record. Some online equipment lenders will consider a younger business with documented sales, a signed customer contract or supportive personal credit. Expect a personal guarantee and a higher cost than an established business would pay. Bring bank statements, copies of any contracts and a clear explanation of how the equipment will generate the revenue to cover the payment.

What credit score do I need for equipment financing? #

No single score works everywhere. Each lender sets its own standard and weighs it alongside cash flow, time in business and the equipment itself. Bank loans usually require stronger credit than online equipment loans. A lender may approve a modest score if the equipment is valuable and the payment fits your revenue. Check with several lenders rather than assuming one rejection means you can't qualify anywhere.

Is equipment financing different from an equipment lease? #

Yes. With an equipment loan, you buy the equipment and own it, and the lender holds a lien until the loan is paid. With a lease, you pay to use the equipment for a set term and usually choose at the end whether to buy it, return it or renew. Leases can have lower monthly payments and may suit equipment that becomes outdated quickly. Loans usually build ownership and may cost less over the life of the asset. Compare total cost, including the buyout amount, not just the monthly payment.