Equipment financing: how loans and leases work, and what they cost

How equipment financing works

The equipment secures the deal: The lender pays the vendor, you make fixed monthly payments, and the lender files a lien on that specific piece of equipment until you've paid. If payments stop, the lender's first move is to repossess and sell the asset, which is why the equipment's resale value matters as much as your credit.

The term follows the asset: A lender won't want you still paying for a machine after it has worn out, so terms track useful life: a server rack gets a shorter term than an excavator. Our page on how long you can finance equipment goes asset by asset.

It only pays for the equipment: Equipment financing covers the machine and, with some lenders, the costs of getting it running. It doesn't cover payroll, materials or the slow months while the new machine ramps up, so plan that cash separately.

Equipment loan vs lease: FMV lease or $1 buyout

Three structures cover almost every deal you'll be quoted. The names vary by lender, so read the end-of-term clause rather than the title on the contract.

Why a $1 buyout counts as a purchase: The IRS says an agreement may be a conditional sales contract, not a lease, when you can buy the property at a nominal price compared with its value or with the total you pay. A $1 option is about as nominal as it gets, so you treat the equipment as bought and recover the cost through depreciation instead of deducting the payments as rent.

Worked example: one $120,000 machine, three structures

Assume a $120,000 machine, a 60-month term and the same hypothetical 9% rate on all three, chosen only to make the math easy to check. It is not a market rate; your quote depends on your credit, the equipment and the lender. The FMV lease assumes the lessor expects the machine to be worth $24,000 at the end.

How to read it: if you plan to keep the machine, the FMV lease is the most expensive way to end up owning it, because you pay down most of its value and then buy the rest. If you'll replace it at month 60, the FMV lease is the cheapest path because you never pay for the last $24,000 of value. The fuller decision guide is on equipment lease vs loan.

• You'll run it well past payoff (trucks, machining centers, kitchen lines): take a loan or $1 buyout lease.
• It will be outdated in a few years (computers, some medical imaging, tech that turns over): look hard at an FMV lease.
• You need the lowest payment now and can't put cash down: a lease, then compare the total of payments, not only the monthly figure.
• You want the 2026 tax deduction this year: you need to own it for tax purposes, so a loan or $1 buyout.

What lenders check before approving equipment financing

Equipment lenders look at two things at once: whether your business can carry the payment, and whether the collateral would cover them if it couldn't.

• Time in business and cash flow. Bank statements and, for bigger tickets, tax returns and financial statements show whether the new payment fits. A newer company can still get approved, often with more cash down; see equipment financing for a new business.
• Personal and business credit. Credit sets the price and the down payment more than the yes or no on many equipment deals. Our credit score guide for equipment financing covers what changes as your score drops.
• The equipment itself. General-purpose, widely traded equipment is easier to finance than custom or specialized machinery, because more buyers exist if the lender has to sell it.
• New or used, dealer or private seller. Used equipment and private-party sales get more scrutiny: lenders may want an inspection, photos, serial numbers or an appraisal. See financing used equipment.
• Existing liens. A blanket lien from an earlier loan can cover newly bought equipment too. Search your state's UCC filings before you apply so you're not surprised.
• Your industry. Some lenders limit or exclude certain industries. Our guide to industry-specific lending explains how industry changes underwriting.

Down payments and soft costs: what equipment financing really covers

Down payments vary by deal, not by rule: No single standard exists. Stronger credit, longer time in business and general-purpose equipment tend to lower what a lender asks for, while used, specialized or private-party equipment tends to raise it. Leases often replace the down payment with one or two payments collected upfront.

Soft costs are the line items around the machine: shipping, rigging, installation, testing, sales tax, and sometimes software and training. Some lenders finance them in the same contract and others only finance the hard cost on the vendor's invoice, leaving you to pay the rest in cash.

Soft costs also count for tax: IRS Publication 551 says the cost of property you buy includes what you pay in cash and debt obligations, plus sales tax, freight, and installation and testing. So the $136,700 is the basis you'd depreciate in this example, whether or not the lender financed every line. Ask each lender, in writing, which lines its offer includes.

Section 179 and bonus depreciation for equipment in 2026

Section 179 lets you deduct up to $2,560,000: of qualifying equipment placed in service in a tax year beginning in 2026, per IRS Revenue Procedure 2025-32. The limit shrinks dollar for dollar once you place more than $4,090,000 of Section 179 property in service that year, and the cost of a qualifying sport utility vehicle counts only up to $32,000.

Bonus depreciation is 100%, permanently: for qualified property acquired and placed in service after January 19, 2025, under the 2025 tax law described in IRS Notice 2026-11. The old phase-down schedule was repealed. Property bought under a written binding contract signed before January 20, 2025 is treated as acquired on that earlier date, so the contract date matters.

Financing doesn't stop you from deducting the full cost: Section 179 requires that the property be acquired by purchase and used in your business, per IRS Publication 946, and the borrowed part of the price is part of your cost. A lessee under a true FMV lease doesn't own the equipment, so it deducts rent instead.

Worked example: the first-year cash vs the first-year deduction

Take the $120,000 machine bought with the loan above, placed in service in 2026, and say the business's combined tax rate is 25% (an assumption for the example). If the business has at least $120,000 of taxable business income, a Section 179 election on the full cost cuts its tax bill by about $30,000 for 2026. Its first-year cash out is $12,000 down plus 12 payments of $2,242, or $38,903, so the deduction covers most of what the machine cost in cash that year.

When the income isn't there, the two deductions part ways: Section 179 is capped at your taxable income from the active conduct of a business, with the excess carried to the next year (Publication 946). Bonus depreciation has no income cap and can create a loss. If the same business had only $70,000 of taxable income, Section 179 would deduct $70,000 and carry $50,000 forward, while bonus depreciation could deduct the full $120,000.

Quordx is not a tax advisor. Have your CPA confirm the election before you time a purchase around it, and see our page on equipment financing and Section 179 for more on the deduction.

Where to get equipment financing: dealer, bank or finance company

The best equipment financing for a small business depends on which kind of lender is built for your deal. Compare at least two of these before you sign anything at the dealer's desk.

If the equipment sits inside a larger project, compare the SBA routes on SBA 7(a) vs 504 before you split the project across several lenders.

Mistakes that make equipment financing cost more

• Comparing monthly payments instead of totals. A longer term or an FMV residual lowers the payment and can raise what you pay overall, as the example above shows.
• Signing an FMV lease on equipment you'll keep for years. You pay down most of the value, then pay market price for the rest.
• Assuming the lease is a tax deduction. A $1 buyout lease is generally treated as a purchase, so you depreciate it rather than deducting the payments as rent.
• Forgetting the soft costs. If the lender finances only the hard cost, freight, tax and installation come out of your working capital.
• Missing the automatic renewal clause. Some leases renew month to month unless you give notice before the term ends. Put the notice date in your calendar the day you sign.

Where Quordx fits on equipment deals

Equipment is one of the products Quordx places most directly. The lenders it submits to cover general equipment from about $15,000, larger deals from $150,000 where the credit has a story that needs explaining (that lender talks to the borrower and the vendor directly), and large-ticket deals from $250,000, where a history of profitability matters and software and soft costs can be included.

Below $15,000, dealer financing or your own bank is the better first call. Quordx is a broker, not a lender: you complete one application in about 10 minutes, the lenders decide and price the deal, and Quordx is paid by the lender only if a deal funds, not by you.