Key takeaways

  • Alternatives to equipment loans include term loans, equipment lines of credit, SBA loans and equipment leasing
  • Certain alternatives may provide higher amounts, better rates and extended terms compared to an equipment loan
  • Banks, credit unions and fintech lenders offer various equipment financing options

Compared to other types of business loans, equipment loan interest rates tend to be lower. They are a good tool for businesses that want to repay their loan in set monthly payments.

But equipment loans are not the right choice for every business. You may qualify for better rates with a term loan if you have great credit. Some lenders may require you to have at least two years in business or meet a hefty minimum down payment. Because of this, term loans, lines of credit and SBA loans are all valid options. And depending on your business, you may even consider leasing rather than financing to get the equipment you need.

Here’s a closer look at common alternatives to equipment loans.

Compare alternatives to business equipment loans

Loan type Advantages Disadvantages
Term loan
  • High loan amounts
  • Long repayment periods
  • Lower interest rates compared to other types of loans
  • May take longer to receive funds
  • Not meant to cover more than a one-time purchase
Equipment line of credit
  • Flexible funding as you need it
  • Interest limited to what you spend
  • Purchases limited to equipment
  • Monthly payments are not set
SBA loans
  • Competitive rates and large loan amounts
  • Backed by the government
  • Must exhaust other funding first
  • May take weeks or months to receive funding
Equipment leasing
  • Lower monthly payments
  • Upgrade equipment every few years
  • Equipment is not owned directly
  • Lose out on residual value at end of lease

Term loan

Term loans are one of the most common and flexible alternatives to equipment loans. They are available from various lenders and can be used to purchase any business-related expenses. This includes equipment purchases, such as restaurant or office equipment and semi trucks. You can borrow from a bank, credit union or online lender, and the lump sum can be used to purchase equipment.

They may be your go-to alternative if you don’t have a down payment, which many equipment loans require. Just be aware of the fees lenders charge in addition to interest. Since term loans can be unsecured, your interest rates may be higher.

Equipment line of credit

Like other business lines of credit and business credit cards, an equipment line of credit gives you a set credit limit that you can draw from as needed. You only pay interest on the amount you spend, and your limit is replenished as you pay back your line. And because it is secured by collateral, you may qualify for a lower interest rate than you would on an unsecured line.

But your funding will be restricted to equipment. You can’t draw from an equipment line of credit for other day-to-day business expenses. This makes it significantly less flexible than a line of credit that does not require collateral. So, if you’re looking to buy equipment and cover other expenses, you may want to consider an unsecured business line of credit instead.

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Bankrate insight
The Federal Reserve’s 2023 Employer Firms in Focus: Findings from the 2022 Small Business Credit Survey reported that in the past 12 months, 40 percent of employer firms applied for financing. Auto and equipment loans had an application rate of 12 percent, while business lines of credit and business loans had application rates of 43 percent and 34 percent, respectively.

SBA loans

If you have exhausted other forms of financing, the Small Business Administration (SBA) has a handful of government-backed small business loans that can be used for equipment.

  • 7(a) loans. The standard option, a 7(a) loan, is a term loan that can be used to cover many business-related expenses.
  • 504 loans. A 504 loan is the most similar to an equipment loan. They are intended for most major expenses that grow your business, including equipment.
  • Community Advantage loans. If you are a minority, woman or veteran business owner, consider a Community Advantage loan. You can borrow up to $350,000 with rates as low as the Wall Street Journal Prime rate plus 4.5 percent.
  • Microloans. The SBA Microloan program is for smaller businesses that only need up to $50,000. Like 7(a) loans and the Community Advantage program, they are unsecured, which means you can use your funding for equipment.

Overall, SBA loans have competitive rates but may take longer to apply for and fund than other alternatives you may be considering.

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Bankrate insight
As of September 17, 2023, the SBA has approved 52,716 7(a) loans and 5,581 504 loans. For more information, check out our guide on the SBA’s weekly lending report.
  

Equipment leasing

Equipment leasing allows you to rent equipment rather than buy it directly. This means a lower upfront cost and low monthly payments. And lower monthly payments mean you may reduce your risk of default.

There are two options for leasing equipment: operating and capital leases.

  • Operating leases. An operating lease does not transfer any ownership of the equipment. Instead, your business uses it for the duration of the lease and returns it at the end of the lease period. This short-term option leads to lower payments and can help give your business access to expensive equipment it might not otherwise be able to afford.
  • Capital leases. A capital lease allows your business to purchase the equipment at the end of the lease period. Unlike an operating lease, you can claim both the depreciation and interest as a tax credit. And for tax purposes, you are considered the asset’s owner for the lease’s duration.

Where to find alternatives to equipment loans

Because most business loans can be used to fund equipment, you have options. Banks, credit unions and fintech lenders all have equipment loan alternatives.

Banks and credit unions

Banks are the traditional option for business loans. But a bank loan can be difficult to qualify for, especially if you are a startup or don’t have sufficient revenue. That being said, banks offer the most competitive rates and frequently work with the SBA to offer loans to small businesses. You should be able to find term loans and affordable lines of credit at most major national and local banks.

If you already bank with a credit union, you may qualify for one of its loan options. Like banks, credit unions can offer competitive rates. Because they are member-owned, it may also be easier to qualify for one of their equipment loan alternatives than a business loan from a bank.

Fintech lenders

Fintech lenders operate solely online and have fast loan options, including business loans for bad credit. Many fintech lenders offer strong alternatives to equipment loans. Term loans, lines of credit and other forms of financing are all available. And in almost every case, the entire process, from application to funding, takes place online in a matter of days.

Bottom line

Your business doesn’t need to rely solely on an equipment loan to make a purchase. There are a variety of equipment financing options available — including business loans for startups — that can cover equipment.

The application process can be tedious depending on the lender you work with, so be prepared to outline your needs and why this equipment is necessary. Whichever option you choose, take the time to compare the best small business loans for you and reach out to multiple lenders for quotes.

Frequently asked questions

  • Leasing equipment is an accessible option for business owners who may not qualify for business loans or have enough money saved for a sizable down payment. It’s also a good choice for businesses in industries that frequently see improvements in technology. It allows your business to be flexible and sometimes avoid expensive maintenance as the equipment gets older. But if your business needs to use the equipment consistently, and you know it will last a long time, purchasing it will be the better route.
  • It depends on the goals and overall cash flow of your business. Financing equipment is a better option for businesses that can’t afford the sizable upfront costs needed to purchase equipment or business owners who want to build credit and rack up a positive payment history. But if your business can handle a large down payment or an outright purchase, paying cash for equipment will result in lower overall costs. After all, paying cash means avoiding interest, which can benefit your bottom line.
  • The business loan interest rates start at 5.5 percent for loans from banks and 6 percent for online lenders, but those rates are reserved for borrowers with excellent credit and strong business financials. If you have good credit, you may be able to qualify for an equipment loan with interest rates between 8 percent and 16 percent. But borrowers with bad credit will likely see rates of 25 percent or higher. Keep in mind that interest rates on any business loan vary considerably based on several factors, including the amount of time you’ve been in business and your cash flow.