The Smartest Ways to Fund Your Next Equipment Purchase
March 05, 2026 | Last Updated on: March 05, 2026
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Key Takeaways
There are several financing tools besides equipment financing that can be used to purchase vital equipment, but each one is different ad must be carefully considered to determine if it best fits your situation.
The financing tools that may offer the lowest costs of capital, which are SBA loans and term loans, also have rigid, fixed repayment plans. These tools may be best for business owners with well-defined long-term growth goals.
Equipment financing is great to purchase a single, expensive piece of machinery such as a company car or construction vehicle but might not be good if the small business owner needs several pieces of equipment that have cheaper price tags.
One of the best ways to grow or maintain your small business is by purchasing expensive equipment or machinery. Buying new equipment such as a new CNC processor, vehicles, or, if you run a restaurant, a new brick oven, can drain your cash reserves. Not having that machinery, however, can paralyze your business' daily operations and ruin plans for long-term growth.
Thankfully, there are many financing options you can use to purchase the equipment that's crucial to running your business, but you need to choose carefully. Different financing options require different payment terms, and each has their pros and cons.
Equipment Financing/Leasing
Commonly used by: small business owners who need relatively quick access to funds, may not have the credit score for a term loan or SBA 7(a) loan, and may not have the cash on hand for large down payments.
If you're seeking to purchase a single piece of expensive machinery or a company vehicle, you can finance the purchase through an equipment financing arrangement, or you can lease the equipment through several lease options.
With equipment financing, a lender will purchase an expensive piece of machinery outright, and you pay for it over time with interest. With equipment leasing, you can lease the equipment for a short amount of time while making a monthly payment for its use (operating lease).
You can also engage in a lease in which you lease to own the equipment (capital lease). Generally, both will be slightly more expensive than dealer financing in terms of cost of capital, but dealers may require large down payments, whereas equipment financing and leasing generally do not.
Equipment financing has its advantages:
Equipment financing may be generally be used if a small business owner plans to use the equipment, such as a company car or a CNC processor, for the life of the equipment.
Equipment financing pays for the exact cost of the equipment, whereas with other types of financing, you may end up borrowing more than you need.
Equipment financing may be a good option if the small business owner has a good - but not excellent - credit score. This may qualify the borrower for equipment financing but not an SBA loan. Since the equipment itself serves as collateral in equipment financing, the requirements for equipment financing are generally easier than a traditional, unsecured loan.
Tax benefits. Section 179 of the IRS code allows you to take a deduction on the full cost of the piece of equipment when it's brand new, so you don't have to worry about depreciation when taking deductions. In some cases, you may even be able to take a deduction off the depreciation in value of the piece of equipment. As this is a somewhat complicated code, you may want to consult with a tax professional to determine the best ways to take advantage of it.
Equipment financing can assist in maintaining a smooth cash flow. Equipment financing requires fixed monthly or weekly payments, depending on the lender. Since hte payments are fixed, this may make long term financial planning easier for small business owners.
Equipment Leasing also has its advantages:
Leasing expensive equipment may provide a hedge against depreciation, as many lease deals can be restructured to allow a small business owner to upgrade to the latest piece of equipment.
Every lender is different, but some operating and capital lease agreements include the cost of maintenance and repairs to pieces of equipment.
Leases provide the small business owner with flexibility of use. If a small construction company, for instance, needs a backhoe for a particular project but no longer needs it once the project is finished, the company can allow the lease to simply expire and not have to own it.
Lease payments can often be treated as fully deductible operating expenses rather than capital expenses under section 179.
SBA 7(a) or 504 Loans
Commonly used by: Small business owners with excellent credit scores and want to purchase new equipment for long-term goals.
SBA 7(a) loans can be used to purchase new equipment and could be attractive options since they generally charge lower interest rates and fees than online or traditional lenders. An SBA 7(a) loan is essentially a term loan that is partially guaranteed by the U.S. Small Business Administration and are offered by lending institutions that are approved by the SBA. For qualified borrowers, the lender provides a large, lump sum of money that is to be paid back with interest over a predetermined period.
An SBA 504 loan is offered by SBA-chosen community development corporations and can also be used to purchase business equipment. These loans range between $50,000 to $5.5 million, and generally are awarded to for-profit, brick-and-mortar businesses that are established in their communities. The terms on these loans can be 10,20 and 25 years.
SBA 7(a) loans range between $350,000 to $5 million. Loans to small businesses seeking to purchase equipment typically have a duration of 10 years. Points to be taken in consideration of both are:
Both offer lower interest rate charges than other types of financing offered by both private lenders.
Both offer long-term repayment plans that may result in smaller payments, making 7(a) and 504 loans good choices for lower margin businesses.
Both loans require excellent credit scores (usually 700 and above) and more paperwork than other types of financing, including a detailed business plan on how you plan to use the borrowed funds to grow your business
Can I Use Term Loans to Purchase Equipment?
Commonly used by: Small business owners who have long-term growth plans contingent upon owning certain equipment. It is also good for small business owners that have credit scores that may not be good enough to qualify for an SBA 7(a) loan.
Small business owners can use term loans to purchase equipment. A term loan is like an SBA 7(a) loan with the biggest difference being that the loan is not guaranteed by the SBA and therefore will probably charge a higher interest rate. Term loans are offered by both traditional banks and online lenders, with online lenders typically requiring less paper and quicker fund disbursement, although often charging a slightly higher interest rate.
By using a term loan to purchase equipment, a small business owner gets:
A structured and predictable repayment plan that can be spread out over multiple years, depending on the lender.
The benefits of ownership can be good if the equipment retains its value over time.
Tax advantages. The small business owner still may get the benefits of section 179 of the IRS code.
Lower rates. Term loans typically charge less in interest than other types of unsecured financing such as business lines of credit and business credit cards.
Revenue-Based Financing
Commonly used by: Small business owners with strong sales histories but may not qualify for a term loan or an SBA loan. Also best for small business owners who need funding quickly.
Revenue-based financing is often a more expensive than other types of financin. In a revenue-based financing arrangement, the lender gives a lump sum of cash to a borrower and instead of repaying the principal plus a fixed interest rate, the small business owner agrees to pay a percentage of estimated future receivables until the total amount plus fees are paid back.
Instead of charging an interest rate, the buyer agrees to pay a factor fee, which is a multiple of future sales. For example, if the borrower obtains $100,000 with a 1.25 factor fee,
The borrower would ultimately repay $125,000 plus any additional fees.
While revenue-based financing is expensive compared to other forms of financing, the advantages are:
If they qualify, small business owners will receive funds more quickly than other types of financing. If a small business owner needs to purchase or replace expensive machinery quickly, revenue-based financing may be a good bet.
Lenders generally emphasize a business' sales history rather than credit score when evaluating a potential revenue-based financing candidate. This means that an applicant that has a less-than-excellent credit but a strong, predictable sales history can qualify.
Flexible repayments. Many small business owners cite flexible repayments as one of the biggest advantages of revenue-based financing. That's because in a revenue-based financing deal, While the fixed percentage stays the same throughout the life of the contract, the payments themselves will fluctuate as your sales fluctuate.
Business Line of Credit
Commonly used by: Small business owners seeking to quickly purchase equipment costing less than $500,000.
A business line of credit is a financing tool that provides flexibility to small business owners. This type of financing provides a predetermined line of credit that qualified small business owners can draw against at any time, and the borrower only pays interest on the amount borrowed. Lines of credit often come with terms and fees, with some lenders requiring the entire balance be paid off at various intervals.
Despite its flexibility, there are a few things to note with a business line of credit.
Speed of funds. Once the line of credit is established, the small business owner can draw upon it at any time during the contract and quickly
The amount of credit offered in a business line of credit typically doesn't exceed $500,000. Therefore, it might be good for equipment such as new computers, printers or even a company car. However, if the small business owner is seeking expensive items such as heavy construction equipment or advanced manufacturing machines, a business line of credit probably won't be able to provide enough money to purchase the equipment.
Choose the Right Path
Don't make mistakes in choosing the right way to finance new equipment, as the wrong choice could both hurt your cash flow and dash your long-term growth plans. Decide what you prioritize, be it speed of funding, the the lowest cost of capital or the efficiency of equipment financing. By matching your financing strategy to your specific needs, you ensure that you are matching your financial goals with long-term. Take the time to weigh the trade-offs today so you can build a more resilient, better-equipped business tomorrow.
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Frequently Asked Questions
1. What is the difference between equipment financing and equipment leasing?
The main difference is ownership. With equipment financing, you are essentially taking out a loan to buy the asset; you own it once the loan is paid off. With leasing, you are paying for the use of the equipment for a set period. At the end of a lease, you typically return the equipment, though some "capital leases" allow you to buy it for a small fee (like $1) at the end.
2. Do I need a perfect credit score to qualify for equipment funding?
While SBA loans generally require excellent credit (700+), other options are more flexible. Because the equipment itself serves as collateral, many lenders will approve good or even fair credit scores for equipment financing. If your credit is lower but your sales are strong, revenue-based financing is an excellent alternative because it prioritizes your bank statements over your credit report.
3. Is it better to lease or buy equipment that becomes obsolete quickly?
In most cases, leasing is better for high-tech equipment (like computers or medical devices) that needs frequent updates. Of course, which is better will depend on each individual circumstance and business, but leasing allows you to trade in the old model for the latest version at the end of your term. Financing (buying) is better for "heavy" machinery with a long lifespan, such as a brick oven or a tractor, where owning the asset long-term provides more value.
4. How does the Section 179 tax deduction work?
Section 179 is a major incentive that allows you to deduct the entire purchase price of qualifying equipment from your gross income in the same year you buy it. Instead of writing off small portions of the value over several years (depreciation), you get the full tax benefit immediately. This applies to both new and used equipment, as long as it is "new to you.” Again, section 179 is complicated, so you should consult with a tax expert to determine the best ways to take advantage of it.
5. Can I use a Business Line of Credit for heavy machinery?
A business line of credit may not be the best financing to purchase equipment. Business lines of credit typically cap out around $500,000 and are designed for short-term needs or smaller purchases (like office furniture or a company car). For very expensive, long-term assets like advanced manufacturing machines, a term loan or an SBA 504 loan may be more appropriate because they offer longer repayment periods and lower interest rates.