Why the asset changes the answer
In unsecured commercial lending, a funder’s only recovery route is the business itself: its cash flow, its guarantor, and whatever a general lien eventually produces. In equipment finance there is a second route. If the facility stops performing, the funder takes the asset back and sells it.
That second route is worth real money in the pricing, and it is why equipment facilities frequently clear when a general working capital request from the same business would not. Underwriting shifts weight away from the borrower and onto the collateral: what is it, what is it worth today, what will it be worth in three years, and how quickly could it be sold to someone else in the trade?
The corollary is that not all equipment is equally financeable. A CNC machine, a Class 8 tractor, a commercial oven, a dental chair — these have deep resale markets, published values and buyers in every state. A highly customised production line built for one facility has almost no resale market, and funders price that in or decline. If you are financing something bespoke, expect a larger deposit and a shorter term.
Loan, capital lease, operating lease
Three structures dominate, and the marketing names funders use for them are inconsistent enough that you should ignore the label and read the mechanics.
Equipment loan
You own the asset from day one. The funder files a lien against it. You depreciate it, you carry it, and when the loan is cleared the lien is released. Usually requires a deposit — commonly ten to twenty per cent — because a funder rarely wants to be lent up to one hundred per cent of a depreciating asset on day one.
Capital lease (often “$1 buyout”)
Legally a lease, economically a purchase. You make lease payments for the term and buy the asset at the end for a nominal amount. Frequently finances closer to the full cost, which is why cash-tight businesses gravitate to it. Accounting treatment generally puts the asset and the liability on your balance sheet, so it affects leverage ratios like debt does.
Operating lease (fair market value)
Genuinely a rental. Payments are lower because you are only paying for the portion of the asset’s life you use. At the end you return it, renew, or buy it at fair market value — a figure typically not fixed at signing. Sensible for anything that goes obsolete: IT hardware, diagnostics, vehicles on a fixed replacement cycle.
The residual is where a low monthly payment hides. A lower payment with an unfixed balloon at the end is not cheaper money — it is deferred money.
Residuals and balloons: read this bit twice
A residual is the value assigned to the asset at the end of the term. The higher the residual, the lower your monthly payment, because you are financing a smaller share of the total cost. This is the most common way an equipment quote is made to look competitive.
Two questions settle it. First: is the end-of-term purchase price fixed in the contract, or is it “fair market value at the time”? An unfixed residual on an asset you intend to keep is an open cheque you will write in three years. Second: what happens if you simply hand it back? Some agreements carry return conditions — hour limits, mileage bands, refurbishment standards — that produce a substantial invoice at the exact moment you thought the facility ended.
| Line item | Why it matters |
|---|---|
| Total of payments | Payment amount multiplied by the number of payments. The only figure that compares cleanly across structures. |
| Deposit / first and last | Cash out on day one, which never appears in the monthly figure. |
| Documentation fee | Often several hundred to a few thousand dollars, added at signing rather than quoted. |
| End-of-term price | Fixed dollar amount, nominal buyout, or unfixed market value. Get it in writing. |
| Return conditions | Hours, mileage, condition standards, and the cost of failing them. |
| Early payoff | Whether early settlement saves interest or simply accelerates the full total. |
| Insurance requirement | Coverage levels and loss-payee wording the funder will insist on. |
| Cross-collateral | Whether default on this facility puts other assets in play. |
Vendor finance at the point of sale
Most equipment dealers offer finance at the counter, often through a captive funder or a panel arrangement. It is quick and sometimes genuinely competitive, particularly when a manufacturer is subsidising a rate to move stock at quarter end.
It is worth understanding the incentive, though. The salesperson quoting the finance is compensated on the equipment sale, not on getting you the cheapest money, and a subsidised rate is frequently paired with a firmer price on the machine itself. Ask for the cash price and the financed price separately. If the dealer will not separate them, that is your answer about where the subsidy is coming from.
Documents a credit desk will ask for
- A vendor quote or invoice with the make, model, year and serial or VIN.
- Three to six months of business bank statements.
- Entity documents and evidence of good standing.
- A personal guarantee from principals, in most cases, below a certain facility size.
- For used equipment, an inspection or appraisal, and sometimes proof of hours or mileage.
- A certificate of insurance naming the funder as loss payee before funds release.
Because the asset carries much of the credit weight, equipment applications often move faster than a comparable working capital request — days rather than weeks, provided the quote and the entity documents are clean. The two things that reliably slow a file down are a quote missing a serial number and an insurance certificate with the wrong loss-payee wording. Both are avoidable.
If you are still deciding whether the requirement is really an equipment facility or a general shortfall, start with working capital versus a term loan. If your problem is customers paying slowly rather than a machine you need, read how factoring works instead. Either way, what underwriters review tells you what to have ready.