Business equipment financing is funding you get to buy or lease equipment, tools, tech, or machinery necessary to run your business. With equipment financing, the item you want to acquire serves as collateral for your loan. Therefore, if you cannot make your payments, your lender can seize the equipment to recoup their losses.

In the U.S., 79% of companies use financing to obtain equipment, according to the Equipment Leasing & Finance Foundation. The foundation estimated that organizations would spend $1.8 trillion in 2019 to acquire software and equipment.

Equipment loans differ in how they’re structured. Unlike some other forms of financing, the use of equipment loan proceeds is restricted. You can only use the funds to buy a specified piece or lot of equipment. This is in contrast to a business term loan or line of credit where you can spend funds flexibly.

Using equipment financing, you can improve your business cash flow and increase capital.

You can keep your normal cash flow, and leave your money in the bank. So, you can avoid major out of pocket expenses incurred by buying the equipment up front. And you can benefit from multiple tax advantages.

Equipment leasing is one of the most common types of business funding available today.

When leasing machinery, you will find most leasing options offer you fixed-rate funding.  This means your interest rate and payments will stay the same from month to month during the term of your lease.

Equipment loans are secured by the equipment being financed. For example, if you bought a new industrial freezer and financed it with an equipment loan, then the freezer would serve as collateral for that loan.

Equipment financing benefits include that you will pay a set amount each month, which makes budgeting easier.  Also, you can build business credit if your creditor reports your payment to the business credit reporting agencies. 

In addition, it’s easy to upgrade equipment after your lease ends.  This can be helpful if your equipment is something like a computer which quickly becomes obsolete.

You may have to make a large down payment. If your financed equipment becomes outdated, your business is stuck with it until the end of the lease or loan. Sometimes, leases can end up actually costing more than purchasing. When the lease ends, you  have to get  a new lease or to make other arrangements. Whereas, if you buy the equipment outright you can sell it if you want.

One popular type of equipment financing is the Fair Market Value lease, also called an FMV lease. With an FMV lease, you make regular payments while borrowing the equipment for a set term. When the term is up, you have the option to return the equipment or purchase it at its fair market value.

This is a type of capital lease. You pay off the cost of the equipment, plus interest, over the course of the lease. In the end, you owe exactly $1.

Once you pay the $1 residual.  which is essentially a formality, you fully own the equipment. This type of lease is very similar to a loan in terms of structure and cost.

This lease is the same as a $1 lease. But at the end of the term, you have the option to buy the equipment for 10% of its costs. These tend to have lower monthly payments than a $1 buyout lease