Paying for heavy machinery, vehicles, or technology in full up front isn’t realistic for a lot of companies. In 2024, equipment leasing and finance represented a $1.3 trillion market in the US alone. Business equipment loans and other equipment financing make it possible to get the tools your business needs now, without eating up all of your working capital.

Equipment loans help companies across all industries invest in growth while keeping cash flow stable. Below, we’ll explain how business equipment loans work and how to decide which financing option best fits your needs.

What’s in this article?

• What is a business equipment loan?
  
• How do business equipment loans work?
  
• What types of business equipment loans are available?
  
• How do you qualify for a business equipment loan?
  
• What are the pros and cons of equipment loans?
  
• Who offers the best business equipment loans?
  
• How do you apply for a business equipment loan?
  
• What are the alternatives to business equipment loans?
  
• How Stripe Capital can help
  

What is a business equipment loan?

A business equipment loan is financing that helps a company buy the tools, vehicles, or machines they need to operate without paying for everything up front. Once the loan is paid off, you own the equipment outright. This structure works across almost every industry: restaurants use them for ovens and refrigeration, construction firms for heavy machinery, farms for tractors, clinics for imaging devices, and offices for computers. Around 82% of US businesses use some kind of financing to purchase equipment.

How do business equipment loans work?

An equipment loan works much like any business loan, except the equipment you’re buying acts as collateral. That can make approval easier and rates better.

Here’s how it typically works:

• Apply and get approved: You share information with the lender about your business, finances, and the equipment you plan to buy. They’ll consider your credit, revenue, and the asset’s value before making a decision.

• Agree to terms: If you’re approved, you’ll receive an offer outlining the loan amount, interest rate, and repayment period (often two to five years, depending on the equipment’s lifespan). Rates are usually fixed with consistent monthly payments.

• Purchase the equipment: The lender often pays the vendor directly, so you can take the delivery quickly.

• Repay over time: You’ll make regular payments that cover principal and interest. Once the loan is paid off, the equipment is yours.

What types of business equipment loans are available?

The right loan structure depends on what you’re buying and how long you’ll need it.

Here are the main options:

• Equipment loans: This is traditional financing where you borrow to buy equipment and pay it off over time. You own the equipment from day one, though the lender holds a lien until it’s fully repaid. This route is best when the equipment has a long lifespan or holds its resale value.

• Government-backed loans: These loans offer long terms and favorable rates for major equipment purchases. In the US, the SBA 504 and SBA 7(a) loan programs are designed for equipment purchasing with repayment terms of 10–25 years, depending on the loan.

• Vendor financing: This is financing arranged directly through the equipment seller or manufacturer. It’s often convenient and might come with low or promotional interest rates. Compare terms with a traditional lender to ensure you’re getting the best deal.

How do you qualify for a business equipment loan?

Qualifying for an equipment loan depends on a mix of credit strength, business performance, and the value of the equipment.

Here’s what lenders usually look for:

• Credit score: Banks often have higher minimum credit score requirements for lending, but some alternative lenders work with lower scores if other factors are strong. A better score usually means a better rate.

• Time in business: Many lenders require at least one to two years of business history. A longer track record makes approval easier, but startups can sometimes qualify if the owner has good personal credit or offers a large down payment.

• Financial stability: Expect to share business tax returns, bank statements, and other financial documents. Lenders typically look for reliable cash flow that comfortably covers any potential loan payments.

• Equipment details: The equipment itself matters, specifically its cost, expected lifespan, and resale value. Lenders often rely on it as collateral, so they tend to prefer assets with strong market value.

• Down payment: Many loans require 10%–20% upfront, especially for younger businesses or used equipment. Putting cash down can also help lower rates or improve approval odds.

What are the pros and cons of equipment loans?

Equipment loans are a practical way to finance growth, but they’re not perfect for every situation.

Here’s a look at both sides.

Pros of equipment loans

• Immediate access to essential tools: You get the equipment you need now instead of waiting to save up.

• Ownership and equity: Once the loan is paid off, the equipment is fully yours, an asset on your balance sheet that might hold resale value.

• Built-in collateral: Because the equipment secures the loan, lenders often offer lower rates and easier approval compared with unsecured financing.

• Predictable payments: Fixed rates and regular installments make budgeting simple and cash flow steady.

• Tax advantages: Interest and depreciation might be deductible, depending on how the asset is used. Check with a tax professional to confirm eligibility.

Cons of equipment loans

• Total cost: You’ll pay interest and possibly fees, so the total price exceeds the equipment’s sticker cost.

• Depreciation risk: If the equipment becomes outdated or loses value quickly, you’re still on the hook for the loan.

• Cash commitment: Down payments or insurance on the equipment can tie up capital.

• Fixed payments: If you have a seasonal business, the regular payments can strain cash flow during slow months.

Who offers the best business equipment loans?

The best lender depends on what your business values most (e.g., speed, flexibility, savings).

Here’s how the main options compare:

• Banks and credit unions: Banks offer the lowest rates and longest terms, but they also require strong credit, solid financials, and patience for a slower approval process.

• Online lenders: Online lenders move fast, often approving and funding in a few days, and they work with newer businesses or those with lower credit scores. But they have higher interest rates in exchange for that convenience.

• Specialized equipment finance companies: These firms focus exclusively on equipment and often understand your industry’s assets and cash cycles. Some offer custom terms, such as seasonal payments.

• Government-backed loans: Government lenders provide good long-term value for qualified borrowers. In the US, loans such as the SBA 7(a) or 504 programs offer low, fixed rates and extended repayment periods.

• Vendor financing: Going through the equipment vendor to bundle purchase and financing can sometimes be simpler and get you promotional rates. But you should always compare total costs before signing.

How do you apply for a business equipment loan?

Applying for an equipment loan is mostly about showing lenders your business is stable and that the equipment will pay for itself.

Here’s how to apply for a loan:

• Identify what you need: Get quotes or proforma invoices from vendors so you know the exact equipment cost and specs.

• Check your qualifications: Review your credit score, time in business, and annual revenue. If one area is weak, see if you can strengthen another.

• Compare lenders: Look at banks, online lenders, and equipment finance firms. Compare the total costs, as well as interest rates, fees, terms, and collateral requirements.

• Gather documentation: Lenders often ask for business tax returns, bank statements, financials, and proof of equipment value. Get digital copies ready to upload.

• Apply and review the offer: Fill out the application carefully. Once approved, read the terms closely—especially the repayment schedule, fees, and any prepayment penalties.

What are the alternatives to business equipment loans?

If a traditional equipment loan isn’t the right fit, there are other ways to fund the tools your business needs.

Here are a few options:

• Equipment leasing: In 2023, 26% of businesses used leasing to acquire equipment or software. Leasing lets you rent equipment for a set period with little or no upfront cost. This is ideal for assets that become outdated quickly or need frequent upgrades.

• Business line of credit: You can draw on funds from a line of credit as needed and pay interest only on what you use. This is helpful for smaller or recurring equipment costs.

• Revenue-based financing: This lets you access capital based on your sales history and is repaid through a share of daily revenue.

How Stripe Capital can help

Stripe Capital offers revenue-based financing solutions to help your business access the funds it needs to grow.

Capital can help you:

• Access growth capital faster: Get approved for a loan or merchant cash advance in minutes—without the lengthy application process and collateral requirements of traditional bank loans.

• Access financing with your revenue: Capital’s revenue-based structure means you pay a fixed percentage of your daily sales, so payments scale with your business performance. If the amount that you pay through sales doesn’t meet the minimum due each payment period, Capital will automatically debit the remaining amount from your bank account at the end of the period.

• Expand with confidence: Fund growth initiatives such as marketing campaigns, new hires, inventory expansion, and more—without diluting your equity or personal assets.

• Use Stripe’s expertise: Capital provides custom financing solutions informed by Stripe’s deep expertise and payments data.

Learn more about how Stripe Capital can fuel your business growth, or get started today.