Featured ExpertS
Rob Misheloff President, Smarter Finance USA View bio
Ralph Petta President & CEO, Equipment Leasing and Finance Association View bio

This guide was written by

Jennifer DeMeritt

Whether they run a farm or a factory, many small business owners depend on expensive machinery. If they don't have a lot of cash on hand to invest in those tractors or assembly line machines, they'll need some sort of equipment financing. A variety of lenders offer financing that's specifically designed to help business owners pay for equipment. Read on to learn about the different types of equipment financing. We'll show you how to avoid the common pitfalls so you can really put your money—and your machines—to work.

Equipment Financing Resources

*Equipment financing companies that have an A+ rating with the BBB and/or good reviews from reputable review sites.

Equipment Financing 101

icnSeventy percent of companies use financing when they need to acquire equipment, according to the Equipment Leasing and Financing Association (ELFA). This ranges from $5,000 for a high-end computer workstation to $50,000 for a farm tractor and $600,000 for IT equipment at a web hosting company. Some large businesses, like construction companies or medical centers, may finance millions of dollars' worth of equipment.

Financing can be a game-changer. A long-haul truck driver, for example, could potentially double his personal income if he had the funds to buy his own truck instead of driving someone else's. Financing is also a smart strategic decision for a business owner who doesn't want to own the equipment long-term—for example, a technology company that frequently upgrades its computers might be best off leasing them.

In all cases, the financing must be for physical items — like a piece of machinery — not something like a training program. The equipment then serves as collateral. Here are several different types of equipment leases and loans:

Finance lease

No down payment is required. The full value of the equipment is paid off by the end of a finance lease, which is usually as long as the estimated life of the equipment. You have the option to purchase the equipment when the lease expires for as little as $1.00, or for a nominal fee specified in the lease agreement. It's a good choice if you want to own the equipment long-term.

True lease

Also called fair market value (FMV) leases, these rarely cover the full expected life (or the full value) of the equipment. The entire monthly payment is tax-deductible, and when the lease is up you can return the equipment or buy it for fair market value. An FMV lease makes sense if you plan to upgrade to a newer model when the lease expires.

True loan

Equipment loans typically require a down payment as high as 20 percent. You are the legal owner of the equipment from the start of the loan, so you can depreciate it on your taxes. You can also save on interest if you're able to pay off the loan early.

How Do You Chose the Right Lender for Equipment Loans and Leases?

First, make sure the financing company has expertise in your business sector and the kind of equipment you need. "Work with an equipment finance advisor who understands your particular market," says Ralph Petta, president and CEO of the Equipment Manufacturers and Leasing Association. "The equipment finance company's understanding of market fluctuations and other factors that impact your business can greatly affect the successful outcome of a lease contract."

If you don't qualify for financing from a bank and you plan to work with an alternative lender, bear in mind that non-bank lenders don't face the same government regulation as banks. It's a good idea to check customer reviews on websites like Yelp, Ripoff Report, and the Better Business Bureau to see if they have unethical business practices.

The Cost of Equipment Financing

What's the price tag for your equipment? Among other things, the cost of financing depends on:

  • Where you get it (a bank, manufacturer, or private lender)

  • Your business credit score

  • How long you've been in business


Banks and some large manufacturers (such as Caterpillar and GE) offer interest rates as low as 4 percent, but they require a solid credit score and at least two years in business. Not surprisingly, this means startups rarely qualify.

Non-bank financiers offer equipment financing to startups and business owners with weaker credit, though they charge higher interest rates—typically in the range of 8 percent to 30 percent, depending in part on your credit score.

Such companies are not necessarily trying to gouge entrepreneurs, although there are definitely some that have. Rob Misheloff, head of the brokerage Smarter Finance USA, explains that high interest rates protect financiers from the low resale value of used equipment and the high risk of default among small businesses. "The default rate in some equipment lender portfolios is 30 percent," he says, compared to 7 to 8 percent among credit card companies.

The problem is that only 50 percent of small businesses survive for five years or more, according to the Small Business Administration, which means that equipment financiers want to collect payments from new businesses quickly. "Risky borrowers...might only be offered an 18- to 24-month term," Misheloff says. "High-quality borrowers... [with a longer time in business and better credit] can get five-year terms or deals above $100,000 or $500,000."

How does all this apply to, say, a $20,000 pizza oven? Since the restaurant is a new business, financing will probably come from a private lender instead of a bank. Even with good credit and a solid business plan, you can expect an interest rate on the high side and a short payment term. When deciding which type of financing to opt for, a finance lease could be a good choice, since you'll probably want to own the oven long-term. If you get a 24-month lease at 12 percent interest, the monthly payment will be $941, with a total interest payment of about $2,595.

How to Apply for Equipment Financing


While some online financiers promise a quote within just a few days, the application process will be quicker and less stressful if you prepare in advance. Let's take another look at that $20,000 pizza oven.

Research your equipment needs

This goes beyond what kind of equipment you need to do the job. Evaluate how long you plan to use the equipment, how soon it will need to be replaced or upgraded and how long you want to pay for it. Do you want a trendy wood-fired gas-assist oven? A deck oven? A conveyor oven? In a blog for Pizza Today, Pascuale Bruno says to ask yourself how much space you have for the oven, how many pizzas you plan to produce an hour and other questions you really need answers to.

Check your own credit score

Even if you have a solid credit history, check your credit score. If there are errors, do whatever you can to clean them up. If you have outstanding debts or liens, try to pay them off before applying for equipment financing.

Prepare a business plan

Whether you're a startup or well-established, a business plan shows lenders that you have a clear roadmap. Describe how your business fills a specific need in the market, and back it up with numbers. Detail profits and expenses. Set attainable financial goals—and explain how the equipment you want will help achieve them. There are a lot of pizza places out there; what makes yours so compelling? Maybe you have plans for daily live music and outdoor seating. If so, make sure you've checked out local zoning issues.

Write a personal resume

Show how your business builds on past accomplishments. If you've spent 15 years working your way up through the restaurant biz, from waiter to manager to district honcho, the lender financing the pizza oven will want to know about it. A track record of success proves you're a good investment.

Gather financial records for your business

Lenders will scrutinize a host of records, including bank statements, tax returns, balance sheet and profit and loss statements. If you don't have one already, hire an accountant to make sure they are accurate. Lenders want to make sure your pizza business has a solid financial foundation.

Gather financial records for yourself

These are especially important if you're launching a new business. Personal income tax returns and bank records will show a lender how you handle money and whether you're likely to honor the financing agreement.

Equipment Financing: Do You Know the Risks?

Though equipment financing can boost your business, there are some potential risks. A line-by-line review of your financing agreement—or better yet, going over it with a lawyer—is the best way to prevent unpleasant surprises. Here are some common pitfalls to watch out for:

You can't end the lease early. If you get a lease instead of a loan, you can't save on interest by paying early. When you sign a lease agreement to pay $900 for 36 months, explains Misheloff, that's exactly what you're obligated to pay. This allows the financing company to collect enough interest during the relatively short term of a lease to earn a profit. Some financiers even charge a penalty for ending a lease early.

Beware of automatic renewal clauses. You might be required to notify the financing company 90 to 120 days before the end of the lease telling the company whether you intend to renew it. This gives them time to plan what to do with the equipment if you don't purchase it. But if you miss the notification deadline, the lease could automatically renew—even if you've already paid for the full value of the equipment—leading to thousands of dollars in extra payments. If your lease agreement contains an automatic renewal clause, mark your calendar so you don't miss that deadline.

If the equipment doesn't work, you still have to pay. The financing company and the equipment vendor are often separate entities, and the financing company isn't responsible for the quality of the equipment. If there's a problem with the equipment, you need to resolve it with the vendor while still paying the finance company.

Your business options might be limited. The finance agreement could ban you from moving the equipment or loaning it to subsidiaries. Make sure you don't anticipate changes to the location or structure of your business while the financing is in effect.

You must insure the equipment. It's your responsibility to pay for insurance for the equipment. The monthly premium is in addition to your loan or lease payments.

Extra costs at the end of the lease. If you return the equipment at the end of the lease, you may have to pay for de-installation and delivery.

Expert Q&A


Interview with Ralph Petta, President and CEO of the Equipment Leasing and Finance Association.

What are the advantages of equipment financing?

Investing in large capital expenditures often represents big financial risks, especially for small companies. Financing versus spending cash can help mitigate the uncertainty of investing in a capital asset.

Some types of leases allow for seasonal business fluctuations—for example, lower monthly payments while a project is ramping up and revenue is not yet being generated from the equipment, or lower payments during the "slow" season.

In addition, many businesses can't afford to buy outright the equipment they need to be competitive. With term financing, they are often able to acquire more and better equipment that may have been out of their reach if they only considered buying it, and the finance company can be responsible for keeping up with the latest technology.

When deciding between an equipment loan and an equipment lease, what factors should a business owner consider?

The right answer depends on the unique needs of the business such as your budget and cash flow. "In general, leasing will provide lower monthly payments," Petta said. "In addition, leasing can often provide 100 percent financing of the cost of the equipment, while loans usually require a down payment." If you expect to use the equipment on a short-term basis (36 months or less), leasing is likely a better option.

"A loan provides you with a depreciation tax benefit," he said. "With a lease, the lessor owns the equipment and realizes the tax benefit." This is usually reflected in a lower monthly rent payment for your business as well as the ability to expense the payment.

Do equipment financiers offer additional services?

Many financing companies provide asset management services that can track the status of equipment, know when to upgrade it and provide services relating to installation, maintenance, de-installation and disposal of the equipment.

You may also want the convenience of product and service bundling. Certain financial products allow customers to finance the entire cost of equipment, including installation, up-front maintenance, training and software charges, thereby packaging systems and ancillary products and services into a single, easy-to-manage solution.