Growing a business can be challenging if you don’t have the capital to purchase items you need. For many business owners, the fate of their business hinges on the equipment it runs on, which can be costly.

An equipment loan might be an option if you can’t buy the equipment you need out of pocket. This is a type of small-business loan you can use to buy the equipment your business depends on. 

While you can use an equipment loan to grow your business, it’s not the right option for everyone. It’s essential to understand how these loans work before applying for one.

Equipment loans help business owners repair or upgrade the machines and materials they can’t do without. For example, these loans can be used to buy medical and dental machinery, industrial equipment, and restaurant ovens. But despite their name, you can use equipment loans to buy tables, phone systems, computers, furniture, and even commercial vehicles. You can finance any tangible asset your business needs to operate with an equipment loan.

Equipment loans are secured, meaning the equipment or item you finance serves as collateral for the loan. Loan terms vary by lender, but you’ll typically need a 20% down payment on the loan. You may be able to borrow as much as $1 million  or more, and annual percentage rates (APRs) often range from 8% to 30%. Repayment periods are generally three to 10 years or longer and, depending on your lender, your payment schedule could be monthly, quarterly, biannual, annual, or seasonal.

If you need an equipment loan, you may want to start with a bank where you already have an established relationship. It’s wise to check rates and terms for multiple lenders to find the loan that best serves your needs. Fortunately, you have several options for equipment loans, including the following:

Many online lenders offer personal loans you can use to finance the equipment your business needs, and others specifically offer equipment loans. If you opt for an online lender, make sure you understand what type of loan you’re applying for. It’s important to verify with the lender that you can use your loan for the purchase of equipment. 

Online lenders can be a good source for financing because the entire loan process is streamlined, from application to funding. You may even be able to receive your loan funds the same day you sign your loan agreement. 

If you need an equipment loan, you may find competitive interest rates with traditional banks, but the application process can be lengthy. Generally, you must submit numerous financial documents, potentially including a business plan or proof that you’ve been in business for a certain amount of time. You may have to wait up to 90 days for an approval decision, but this varies by bank. 

Because credit unions are not-for-profit financial institutions, they can often pass savings down to their members in the form of lower interest rates and loan fees. They’re also community-focused, meaning you might get more personalized service. However, you typically have to be a member to get a loan, and credit unions may have fewer equipment loan options than banks.

Small Business Administration (SBA) lenders provide government-backed loans that often deliver competitive interest rates and repayment terms. However, the application process can be drawn out — sometimes taking up to three months — and you’ll need to meet strict eligibility criteria. Additionally, you must prove that you couldn’t get financing elsewhere.

As with most types of financing, you’ll need to meet eligibility requirements to get an equipment loan. Requirements vary from lender to lender, but here are some common factors that lenders consider when you apply:

Always consider the benefits and downsides of any loan or financial product you’re considering. Here are the pros and cons of equipment loans:

Leasing the equipment your business needs is another option to consider. An equipment lease often requires less upfront capital. Like a car lease, you make payments on the equipment for a specific period, but you don’t own it. This is different from an equipment loan, which enables you to own the equipment outright. Here are the main differences between these two financing options:

If your business or personal credit score is less than ideal, qualifying for a business loan may be challenging, but it’s possible. Since lenders tend to view poor credit as a risk, they’ll likely charge higher interest rates than those for borrowers with high credit scores.