Equipment Financing vs Term Loan 2026

Choose equipment financing when you are purchasing a specific, identifiable piece of equipment — machinery, vehicles, technology infrastructure — and want the asset to secure the financing without pledging other business assets. Equipment financing often approves faster for the specific purchase and requires less general collateral. Choose a term loan when your capital needs are mixed — equipment plus hiring plus inventory — where a single flexible loan is more practical than a dedicated equipment facility.

Yes, though used equipment financing has a tighter approval window than new. Lenders typically require remaining useful life well beyond the loan term and may cap LTV at 70–80% of appraised value versus 90–100% for new equipment. Commodity equipment (forklifts, delivery trucks, standard CNC machines) qualifies more easily for used financing than specialized or proprietary assets with thin secondary markets.

Most equipment financing from banks requires a personal guarantee from owners with 20%+ equity, especially for businesses under 3 years old. Non-bank equipment lenders have similar requirements for newer businesses but may waive the personal guarantee for established businesses with strong credit history and clear debt-service capacity from operating cash flow. SBA equipment loans always require personal guarantees per program rules. Source: sba.gov.

Section 179 is an IRS provision that lets businesses deduct the full purchase price of qualifying equipment in the year it is placed in service, rather than depreciating it over several years. Importantly, this deduction applies to financed equipment — you do not need to pay cash to claim it. Consult a qualified tax advisor for your specific situation; IRS Publication 946 at irs.gov covers the full rules.

Equipment financing from banks typically requires a 680+ personal FICO, 2+ years in business, and a clean equipment appraisal. Non-bank equipment lenders can approve at 600–640 FICO, with rates increasing below 650. Term loans from banks have similar FICO requirements — typically 680+ for standard bank loans. Online term loan lenders are more flexible, often approving at 575–620 FICO for businesses with strong monthly revenue. SBA 7(a) term loans require approximately 650+ FICO per most participating lenders. For both products, time in business and monthly revenue significantly influence the rate and approval decision alongside FICO. Source: Federal Reserve Small Business Credit Survey at fedsmallbusiness.org.

This is called being 'underwater' on the equipment loan — you owe more than the asset is worth. It most often happens with high-depreciation equipment (technology, vehicles, restaurant equipment) financed over long terms at high LTVs. If you need to sell or replace the equipment before the loan is paid off, you may face a deficiency balance — the difference between the sale price and the remaining loan balance. To minimize this risk: choose financing terms that match or are shorter than the asset's useful life, make a larger down payment on rapidly depreciating assets, and consider equipment with strong resale markets as collateral. The IRS depreciation schedule for your equipment type (IRS Publication 946 at irs.gov) is a useful guide to realistic depreciation timelines.