Term Loan vs. Equipment Financing: Which is Best for Construction Companies?
March 18, 2026 | Last Updated on: March 18, 2026
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Key Takeaways
One big difference between a term loan and equipment financing is that in equipment financing, the equipment itself serves as the collateral. Because collateral is “baked into” this financing, the processing time for this financing is often much quicker.
Term loans sometimes allow you to borrow more than the cost of the equipment. The extra money can be used to cover maintenance, whereas equipment financing is strictly limited to the purchase price of the machine.
Both financing options allow construction companies to take advantage of Section 179 of the tax code, enabling a full deduction of the equipment cost in the first year.
Equipment financing is often used by companies focused on rapid growth because it may offer faster processing and reduce certain risks, depending on the circumstances.
For small construction companies, heavy machinery is the backbone of the business, whether it's an excavator for a new residential development or a crane for a high-rise project. These machines usually cost a fortune, however, so the types of financing they use to acquire those machines can be just as impactful as the machinery itself.
When purchasing these machines, the method of financing often boils down to two choices: term loans or equipment financing. Both offer the capital that construction companies need to finish projects and to grow, but each financing choice has different tax implications and risks. It's crucial that construction company owners be careful in choosing which one is best for them.
What is a Term Loan?
Before diving into the “which is better” debate, it's important to define each financing tool.
A term loan is a lump sum of capital provided by a bank or online lender in which the principal is paid back over a predetermined term with interest. In many cases, these loans are unsecured. If the construction company has a weak credit score (620 to 640), the lender - usually a traditional bank – will ask for collateral.
The collateral usually comes in the form of a blanket lien in which the lender can repossess preselected business assets of the borrower in case of default. The benefit of using a term loan to purchase equipment, however, is that the equipment itself often acts as collateral.
Benefits of a Term Loan
A term loan could benefit the construction company in various ways:
In some cases, the construction company can take out a term loan for an amount that is greater than the cost of the equipment. This can leave money left over that can be put toward the cost of maintenance and repairs.
The construction company wants to pay back the cost of the machinery in a relatively short time. Usually, lenders offer short- (less than 1 year year) and long-duration (1 or more years) term loans. If the construction company needs to purchase, for example, a backhoe for a current large project, the company may want to pay back the cost of the backhoe once the invoices for the contract are paid. The owner then has the option to quickly pay for the backhoe with a short-duration term loan. Also, with a short-duration loan, the equipment will probably outlast the life of the loan.
A long-duration loan can benefit the cash flow of the construction company. Fixed monthly payments for a long-duration loan won't hurt the bottom line of the construction company too much and can help it plan its finances since the terms are fixed. This could also be beneficial if the construction company plans to use the backhoe for future projects – the backhoe will continue to help generate income for the construction company while the fixed payments stay manageable.
The construction company can benefit from section 179 of the tax code, which would allow the company to take a deduction on the full amount of the backhoe in year 1, and potentially take future deductions if the piece of machinery depreciates in value.
Potential Drawbacks of a Term Loan
Term loans to purchase heavy construction equipment can have potential drawbacks as well, which small construction company owners should carefully consider before applying for one:
The equipment can become obsolete or break down before the term loan is paid off. When this happens, the business owner is still responsible for the payments.
Term loans often have fixed rates, so if prevailing market rates decrease, borrowers may not benefit from lower rates over the life of the loan.
If you take a term loan specifically to purchase equipment, the borrowed money can only be spent on the cost of that equipment (if your loan amount is equal to the cost of the equipment). Insurance and maintenance costs will be out of pocket for the construction company.
What is Equipment Financing?
Equipment financing may be used if the construction company owner does not qualify for dealer financing but still wants to pay for a piece of heavy machinery over time. It is a type of asset-based loan that pays the exact cost of the equipment, and the borrower pays back the cost of the equipment over a specific time frame with interest. The machinery itself serves as the collateral so, put simply, if you default on the loan, the lender repossesses the equipment.
Equipment financing can have distinct advantages to the construction company owner:
Unlike dealer financing, equipment financing does not require a down payment. The full amount of the equipment is covered by the loan.
Because the collateral in equipment financing is “baked in,” the processing time for the loan could be quicker than a term loan.
In many cases, equipment financing lenders allow the borrower to refinance to purchase the newer model of the purchased equipment, avoiding the risk of the equipment becoming obsolete.
Like with a term loan, the borrower can take advantage of the tax benefits through section 179 of the tax code.
Equipment financing is may be easier to qualify for than a term loan because the equipment serves as collateral.
Unlike dealer financing, many equipment financing agreements do not require a down payment on the equipment, although terms vary by lender.
Equipment financing does have some potential drawbacks, however, which construction companies should carefully consider before seeking this type of financing.
Borrowers can always haggle with the lender on the duration of the loan, but the length generally will be longer than the length of a short-duration term loan. In this case, borrowers may take on the risk that the life of the loan may be longer than the life of the equipment.
Every equipment financing deal is different, but in some cases, the lender may require a down payment.
In a secured term loan, the collateral is pre-agreed upon before the loan is approved. With equipment financing, if you default on the loan, the equipment will be repossessed.
With equipment financing, the construction company can only borrow the exact amount of the cost of the equipment. That means that the construction company is on the hook for the cost of insurance, repairs, and maintenance.
Are There Other Options?
If neither equipment financing nor a term loan are palatable options to the construction company, there are other potential options to look at:
SBA CDC/504 Loan. The U.S. Small Business Administration's (SBA) 504 loan can be a good option if the construction company qualifies for it. These loans are given to small businesses that can demonstrate that they are active in their communities – this includes whether the company employs people from the local community, engages in philanthropic activities associated with the community or makes the community's Main Street look good with a nice storefront. If a construction company qualifies for this type of loan, however, it can be a very good option. A 504 loan usually offers lower interest rates than other types of financing, and the maximum amount of this type of loan is $5 million. However, the requirements to apply for a 504 loan are stringent and involves a lot of paperwork. If the construction company qualifies, funding could take weeks.
SBA 7(a) Loan. This type of loan is often viewed as the gold standard for small business loans. Because this type of loan is partially guaranteed by the SBA, it usually offers lower rates than other types of financing. However, for a construction company to qualify, the owner must have an excellent FICO score . The application process is long and usually requires a lot of paperwork, including a detailed business plan, a personal financial statement and a profit and loss statement. Like a 504 loan, funding may take weeks after approval.
The Verdict: It Depends
Broadly speaking, equipment financing could be a good choice for construction companies looking for speed and because its specific collateral requirement represent slightly less financial risk than a term loan. However, this may not be the case in all instances. If a construction company is seeking capital beyond the cost of the equipment, then a traditional term loan remains a powerful tool. For construction companies that is trying to decide between the two, its best bet is probably to seek advice from a small business funding specialist, consultant and tax expert
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Frequently Asked Questions
1. What is the main difference between a term loan and equipment financing?
A term loan provides a lump sum that can sometimes exceed the equipment's cost to cover repairs or maintenance. Equipment financing is an asset-based loan specifically for the exact purchase price, where the machinery itself serves as the collateral.
2. Do I need a down payment for equipment financing?
Unlike dealer financing, most equipment financing agreements cover 100% of the cost. However, some lenders may still require a down payment depending on the specific terms of the deal.
3. Can I get tax breaks using these financing methods?
Both term loans and equipment financing may allow you to take advantage of Section 179 of the tax code. This enables you to deduct the full purchase price of the machinery in the first year, rather than depreciating it over several years.
4. What happens if I default on an equipment loan?
If you default on equipment financing, the lender will typically repossess the specific piece of machinery. With a term loan, depending on the agreement, a lender might have a "blanket lien" allowing them to seize various business assets to recoup their losses.
5. Is it hard to qualify for these loans with a low credit score?
Equipment financing is often easier to qualify for because the loan is secured by the asset itself. Traditional term loans usually require a higher credit score (700+ for SBA loans), though some lenders accept scores between 620 and 640 if collateral is provided.