# Equipment financing: loan or lease, what it costs, when to wait

**Short answer:** Equipment financing is a loan or lease secured by the equipment. Match the term to its useful life. SBA equipment terms: 10 years, or up to 15 years if the IRS asset class useful life supports it (SOP 50 10 8.1, App. 17, Para. A.2).

Canonical page: https://www.sbaexpress.loans/guides/equipment-financing/
Last checked: 2026-11-09

## On this page

- [How equipment financing works](#how-equipment-financing-works)
- [What a loan costs: a worked example](#what-a-loan-costs-a-worked-example)
- [Test the payback before you borrow](#test-the-payback-before-you-borrow)
- [Loan or lease](#loan-or-lease)
- [SBA options for equipment](#sba-options-for-equipment)
- [When equipment financing is a bad idea](#when-equipment-financing-is-a-bad-idea)
- [Questions to ask before you sign](#questions-to-ask-before-you-sign)

## How equipment financing works

With an equipment loan, you buy the equipment and the lender takes a security interest in it. To protect that claim, the lender files a financing statement, often called a UCC-1 (UCC § 9-310(a)). If you stop paying, the lender can take the equipment under the loan agreement.

With a lease, the lessor owns the equipment and you pay to use it. SBA describes an operating lease as working like a rental that stays off your balance sheet. A capital lease works more like a loan, and you own the asset for accounting purposes (SBA, Buy assets and equipment).

In the Federal Reserve Banks' 2026 survey, 12% of applicants for a loan, line or merchant cash advance sought an auto or equipment loan.

## What a loan costs: a worked example

Suppose you buy a $60,000 machine. You put 20% down, which is $12,000, and finance $48,000 over 60 months. Assume 9% a year. This is an illustration, not a quote.

- Payment: $996.40 a month.
- Payments over the term: $996.40 × 60 = $59,784.
- Financing cost: $59,784 − $48,000 = $11,784.
- Total cash out: $12,000 + $59,784 = $71,784 for a $60,000 machine.

Stretch the same loan to 84 months and the payment falls to $772.28. The total paid rises to about $64,871. That is $5,087 more interest. A longer term eases the monthly burden and costs more.

Compare a lease the same way. Add the down payment or deposit, every lease payment, any fees and the buyout price at the end. Put that total beside $71,784.

Suppose a 48-month lease asks $1,180 a month, with a buyout at fair market value that the lessor estimates at $14,000.

- Lease payments: $1,180 × 48 = $56,640.
- Total to own: $56,640 + $14,000 = $70,640.
- Difference from the loan: $71,784 − $70,640 = $1,144.

The gap is small, and the buyout is an estimate. If fair market value comes in higher, the lease costs more. If you return the machine instead, you paid $56,640 and own nothing.

## Test the payback before you borrow

Suppose the machine adds $2,400 a month in profit after labor and supplies.

- Profit added: $2,400.
- Loan payment: $996.40.
- Left over: $2,400 − $996.40 = $1,403.60 a month.
- Months to recover the $12,000 down payment: $12,000 ÷ $1,403.60 = 8.5.

If you cannot estimate the added profit, you cannot judge the loan. Use a figure you could defend to a banker, not your best month.

## Loan or lease

SBA's equipment guidance weighs upfront cost against lifetime cost.

- **Leasing** needs less cash or credit up front and lets you test equipment on a short term. Shorter leases typically carry higher monthly payments. Leaving early can bring steep termination penalties.
- **Buying** usually costs less over the asset's life and lets you claim depreciation. It fits when you have the cash or credit and expect to use the asset for a long time.

Taxes can tip the balance. The Section 179 deduction lets a business recover the cost of qualifying property in the year it is placed in service. A dollar limit applies, and it is set each year. The property must be acquired by purchase for business use. The deduction is also limited by business income (IRS Publication 946, Ch. 2).

SBA notes that the kind of lease you use can have a significant impact on your business taxes. Ask your tax preparer before you sign.

## SBA options for equipment

- **7(a) and SBA Express.** Equipment can run 10 years, or up to 15 years if the IRS asset class useful life supports it (SOP 50 10 8.1, App. 17, Para. A.2). SBA Express goes up to $500,000. It needs no collateral at $50,000 or less (App. 19, Para. B.3). On other 7(a) loans, the lender generally takes a first lien on the assets the loan buys (App. 19, Paras. B.1 and B.2).
- **504.** The program finances major fixed assets such as land, buildings and long-term machinery and equipment, not working capital or inventory. Equipment must have a useful life of at least 10 years (Sec. C, Ch. 1, Para. C.2).
- **Microloan.** Up to $50,000, from a nonprofit intermediary that sets the terms. It can pay for working capital and the purchase of materials, supplies, furniture, fixtures and equipment (13 CFR 120.707).

The 7(a) variable-rate cap is Prime plus 3.0 to 6.5 percentage points, depending on loan size (13 CFR 120.214(d)). A conventional equipment lender sets its own pricing, so get a written quote from each.

## When equipment financing is a bad idea

- **The equipment has no revenue plan.** Write down the work the machine adds and the month it starts paying. If you cannot, wait.
- **The term outlasts the equipment.** A seven-year loan on a machine you replace in five leaves two years of payments on equipment you no longer use.
- **You are financing running costs.** Training and service fees leave a lender nothing to take back. Use working capital financing for them.
- **The payment crowds out your cash cushion.** Add the new payment to your current debt payments and recheck coverage.
- **A lease you have not read.** Look for automatic renewals, the buyout price, who pays for repairs and insurance, and the penalty to end early.
- **A seller's offer you have not compared.** Ask a bank or SBA lender for a written quote on the same equipment.

## Questions to ask before you sign

- What is the total of all payments and fees?
- Who owns the equipment at the end, and at what price?
- Who pays for repairs, insurance and property taxes?
- What does it cost to end the contract early?
- Does the lender take a lien on only the equipment, or on all my business assets?

## Sources

- [SBA, Buy assets and equipment (sba.gov, read November 9, 2026)](https://www.sba.gov/business-guide/manage-your-business/buy-assets-equipment)
- [IRS Publication 946, How To Depreciate Property, Chapter 2, Electing the Section 179 Deduction](https://www.irs.gov/publications/p946)
- [Uniform Commercial Code Section 9-310, when filing is required to perfect a security interest (Cornell Legal Information Institute)](https://www.law.cornell.edu/ucc/9/9-310)
- [Federal Reserve Banks, 2026 Report on Employer Firms: Findings from the 2025 Small Business Credit Survey (published March 2026)](https://www.fedsmallbusiness.org/2026-report-on-employer-firms)
- [SOP 50 10 8.1, App. 17, Para. A.2 (p. 390)](https://legacy.sba.gov/sites/default/files/2026-10/SOP%2050%2010%208.1%20Technical%20Policy%20Updates%20effective%20%2010.1.2026.docx)
- [SOP 50 10 8.1, Sec. B, Ch. 2, Para. B.1 (p. 126)](https://legacy.sba.gov/sites/default/files/2026-10/SOP%2050%2010%208.1%20Technical%20Policy%20Updates%20effective%20%2010.1.2026.docx)
- [SOP 50 10 8.1, App. 19, Para. B.3 (Para. B begins p. 408)](https://legacy.sba.gov/sites/default/files/2026-10/SOP%2050%2010%208.1%20Technical%20Policy%20Updates%20effective%20%2010.1.2026.docx)
- [sba.gov/loans/504-loans; SOP 50 10 8.1, Sec. A, Ch. 3, Para. A (p. 51)](https://www.sba.gov/loans/504-loans/)
- [13 CFR § 120.707(b); sba.gov/loans/microloans](https://www.ecfr.gov/current/title-13/section-120.707)
- [13 CFR § 120.707(a)](https://www.ecfr.gov/current/title-13/section-120.707)
- [13 CFR § 120.214(d)](https://www.ecfr.gov/current/title-13/section-120.214)
- [SOP 50 10 8.1, Sec. C, Ch. 1, Para. C.2, Machinery and Equipment (Para. C begins p. 226)](https://legacy.sba.gov/sites/default/files/2026-10/SOP%2050%2010%208.1%20Technical%20Policy%20Updates%20effective%20%2010.1.2026.docx)
- [SOP 50 10 8.1, App. 19, Paras. B.1 and B.2, Collateral (Para. B begins p. 408)](https://legacy.sba.gov/sites/default/files/2026-10/SOP%2050%2010%208.1%20Technical%20Policy%20Updates%20effective%20%2010.1.2026.docx)
- [SBA, Microloans (sba.gov, read November 9, 2026)](https://www.sba.gov/funding-programs/loans/microloans)