Equipment Financing

How it works

Loan amount: typically 80-100% of equipment cost. Term: matched to the useful life of the equipment, usually 3-7 years. Rate: 6-15% depending on credit and equipment type. Lender takes a UCC lien on the equipment as collateral.

Two flavors: equipment loans (you own the equipment from day one, depreciate normally, debt sits on your balance sheet) and equipment leases (you rent for the term, often with a buyout option at the end; treated as either operating or capital lease for accounting purposes per ASC 842).

When to finance instead of buying outright

If the equipment will earn more than the cost of financing (a piece of production equipment, a delivery vehicle that enables more revenue), financing is almost always correct — it preserves cash for working capital and earns leverage.

If the equipment is overhead (an office computer, a piece of furniture), the calculus is closer. Pay cash if you have ample reserves; finance if cash is tight. Section 179 deduction allows expensing up to ~\$1.16M of equipment in the year placed in service (2024-2026 limits, IRS), which can offset enough taxes to make either choice attractive.

Loan vs lease, and tax considerations

An equipment loan has you owning the asset from day one, depreciating it on your books, and potentially expensing the full cost in year one via Section 179 or bonus depreciation. An equipment lease (operating lease) keeps the asset on the lessor's books, makes payments deductible as rent, and avoids the depreciation entry but doesn't capture Section 179 benefit on your return.

For equipment with predictable useful life and high residual value (heavy equipment, vehicles), a lease often pencils out cheaper because the lessor can recover residual at end-of-term. For equipment with rapid obsolescence (technology, computer hardware), a short-term lease can be the right call because you don't want to own the depreciated asset at the end of the term.

The Section 179 limit was $1.16M for 2023, indexed annually, with a phase-out starting at $2.89M of total purchases — large enough that most small businesses can fully expense equipment purchases in year one. Bonus depreciation, which had been 100% through 2022, phases down 20% per year through 2026; coordinate with your tax preparer on timing to maximize the deduction in the highest-tax year available.

When financing a vehicle or piece of equipment, get quotes from at least three sources: the dealer's captive finance, your operating bank, and an independent equipment lender (Crest Capital, Balboa, etc.). Dealer financing is convenient but often not competitive on rate; independent equipment lenders specialize in this and can sometimes match the dealer's convenience while beating the rate by 100-200 basis points.