Equipment financing

A loan used to buy business equipment, secured by that equipment and repaid over a term tied to how long the equipment will be useful.

An equipment loan is a term loan with a specific job. The Federal Reserve’s examination manual says term business loans fund long-term assets such as plant and equipment and are repaid from the business’s cash flow on a fixed schedule that can follow the cash flow expected from the asset.

Two things set it apart from other business debt. The first is the term. A lender will not want the loan to outlast the machine. As one published benchmark, the OCC’s agricultural lending handbook says farm machinery and equipment are normally amortized over five to seven years.

The second is the lien. Under the uniform text of Article 9, equipment means goods other than inventory, farm products or consumer goods, and a lender that provides the money to buy goods can hold a purchase-money security interest in them. That matters if another lender already has a lien on all your business assets, because a purchase-money interest perfected when you take possession of the equipment, or within 20 days after, has priority over the earlier lien on that equipment.

Have the vendor quote or invoice ready, along with the financial statements any term loan needs.

Go further

• Business lenders by state: Lenders holding business loan balances.
• Amortization and balloon calculator: Payment for an amount, rate and term you enter.
• Amortization and balloon calculator: Payment, balance at maturity and interest paid, for a loan that amortizes over longer than it runs.
• SBA 504 structure calculator: Bank loan, debenture and down payment for a project, and the fees that sit around them.
• DSCR calculator: Cash flow over debt service. Type the cash flow and the loan terms, see the ratio and the cushion before it falls to 1.00x.
• Equipment financing package checklist: Equipment is the simplest thing a business borrows for. There is a price, an invoice and a machine the lender can take back. The package is short, and the choices are about term, lien and who the lender is.
• How bankers evaluate a commercial loan deal: A credit officer asks one question five ways: how will this loan be repaid, and what happens if it is not? Knowing the five tests lets you size a request before you send it.

Related terms

• Term loan: A business loan for a set amount with a maturity of more than one year, repaid on a fixed schedule from the company's cash flow.
• UCC lien: A lender's claim on business assets other than real estate, made public by filing a financing statement under Article 9 of the Uniform Commercial Code.
• Blanket lien: A security interest that covers all or nearly all of a borrower's assets, present and future, instead of one named piece of collateral.
• SBA 504 loan: A fixed-asset financing in which a bank lends 50 percent or more, a certified development company funds up to 40 percent through an SBA debenture, and the borrower puts in at least 10 percent.
• SBA 7(a) loan: SBA's main business loan program. A lender makes the loan and SBA guarantees part of it: up to 85 percent of $150,000 or less and 75 percent of more, on loans up to $5,000,000.
• Non-bank lender: A non-bank lender is a company that makes loans but does not take deposits, so it is not a bank, a savings institution or a credit union.
• USDA Business and Industry loan (B&I): A business loan in a rural area, made by a private lender, on which USDA Rural Development guarantees part of the lender's loss.

Plain definitions for orientation, not legal, tax or credit advice. A lender's own policy decides what it will do.