The Pros And Cons Of Equipment Financing VS. A Standard Term Loan

equipment financing vs term loan is a common business question when firms need cash for assets or growth. Equipment financing is a dedicated loan secured by the equipment itself; a term loan is a more general lump-sum loan that may be secured by multiple business assets or be unsecured. In this article you’ll learn the practical differences, cost drivers, accounting implications, and when to choose each option.

Key Takeaways

• Equipment financing uses the purchased asset as collateral and is typically paid directly to the seller.

• Term loans provide a lump sum to the borrower and can be secured by all business assets or be unsecured.

• Equipment financing often has lower rates, longer terms for the asset, and faster approvals.

• Term loans are more flexible for multiple needs (working capital, expansion) but may demand broader collateral.

• Review equipment finance agreements closely for interest structure and accounting treatment.

• Use an equipment loan when buying a specific asset; use a term loan when you need flexible cash.

What is equipment financing vs term loan?

Equipment financing vs term loan describes two distinct ways businesses borrow. Equipment financing (also called equipment loans or equipment finance agreements) is purpose-specific: the lender pays the equipment seller, and the equipment itself secures the debt. A term loan is a general loan that delivers cash to the borrower for many uses — it may be secured by multiple business assets or unsecured depending on underwriting.

Government resources and lender guidance show equipment financing is commonly treated as a secured asset loan, while term loans are the broader category used for capital and operational needs.

Quick definitions

• Equipment financing: Loan or finance agreement where the equipment is collateral and usually paid to the vendor.

• Term loan: Lump-sum loan repaid over a defined term; collateral can be the business’s assets or none.

Why does equipment financing vs term loan matter?

Picking the wrong product can raise costs, tie up collateral, or slow approvals. Equipment financing matters when you want lower rates, faster approval, or financing tied to a single asset. Term loans matter when you need flexible funds for growth, payroll, or multiple projects.

Practical differences affect monthly cash flow, tax treatment, and balance sheet presentation — so the choice matters to finance teams and owners. The Small Business Administration highlights equipment purchases as an eligible use under many loan programs, and lenders often structure loans differently for equipment versus general working capital.

How should I compare equipment financing vs term loan cost and terms?

When comparing cost and terms, look at these variables:

1. Interest rate and APR — equipment loans often show lower rates because the asset reduces lender risk.

2. Repayment term — equipment loans may match the useful life of the asset; term loans can be shorter or longer depending on purpose.

3. Fees and upfront payments — origination, documentation, and dealer fees vary.

4. Collateral and personal guarantees — term loans often ask for broader collateral or guarantees.

5. Disbursement method — equipment financing usually pays the vendor directly; term loans pay you the lump sum.

Step-by-step comparison guide

• Step 1: Request APR and total cost for both options.

• Step 2: Compare repayment schedules and final principal balances.

• Step 3: Check collateral and guarantee terms.

• Step 4: Consider accounting and tax treatment (capitalization vs. expense).

• Step 5: Run a cash-flow sensitivity test to see monthly impact.

How do equipment finance agreements differ from loans (accounting and structure)?

An equipment finance agreement (EFA) can differ from a conventional simple-interest loan in structure and accounting. EFAs sometimes lack a stated interest rate in the traditional way and present payments differently; they often resemble conditional sales agreements or lease-to-own structures. That affects how you record the obligation and the asset on your books.

Accounting considerations

• Equipment financing (purchase): Typically capitalize the equipment as an asset and record the loan/lease liability; depreciation applies.

• Term loan (general): Record the cash inflow and corresponding loan payable; if used to buy assets, capitalize accordingly.

• Lease vs loan of a car: Whether a car is recorded as an asset or a leased item depends on lease classification and accounting standards (capital vs. operating lease).

Can you see examples and a comparison table?

Below is a clear comparison using common feature points to help decide.

This table mirrors industry guidance that lenders classify equipment finance separately from general term lending because the collateral and disbursement differ.

What mistakes should I avoid when choosing between equipment financing vs term loan?

1. Using a term loan for one asset without comparing equipment finance costs. Equipment financing may be cheaper.

2. Ignoring the payment method. If the lender pays the vendor directly you avoid misallocated funds; verify vendor pay-out.

3. Overlooking accounting impacts. Misclassifying an EFA can distort depreciation and liabilities.

4. Assuming faster approval always equals lower cost. Dealer financing can be fast but sometimes carries add-on fees.

5. Neglecting residual value or buyout terms in lease-like equipment agreements.

When does equipment financing vs term loan deliver long-term benefits?

Choosing correctly improves cash flow, preserves borrowing capacity, and optimizes tax outcomes. Equipment financing can preserve working capital and often lowers borrowing costs by securing the loan with the asset. Term loans give flexibility for multi-purpose needs and growth investments that aren’t tied to a single asset. For example, during fiscal 2024 the SBA supported increased small-business lending, underscoring that distinct loan products (including equipment and term loans) are central to business funding strategies.

Conclusion and next steps

When weighing equipment financing vs term loan, match the loan to your goal: buy an asset? Equipment finance is often faster, cheaper, and collateral-limited. Need cash for payroll or expansion? A term loan gives flexibility. Always request full APR disclosures, confirm who the lender pays, and review accounting treatment with your accountant.

Next steps:

• Get quotes for both products and compare APR and total cost.

• Ask the lender to explain disbursement and collateral language.

• Run a 12–24 month cash-flow forecast with each option.

• Consult your CPA for accounting and tax impact before signing.

Expert insight / statistic:

The U.S. Small Business Administration lists equipment purchase as an eligible use for many of its guaranteed loan programs, and SBA-backed lending rose in fiscal 2024—highlighting the broad use of both equipment-related and term lending for small firms.

FAQs:

What is the main difference between equipment financing and a term loan?

Equipment financing is secured by the equipment and typically pays the vendor directly; a term loan provides a cash lump sum and may use broader collateral.

Which option usually costs less?

Equipment financing often has lower interest rates because the asset reduces lender risk, but compare APRs and fees to be sure.

Can I finance a car as equipment or a term loan?

Yes—cars can be financed via an equipment loan, lease, or general term loan; lease vs loan accounting differs by contract terms.

How does an equipment finance agreement affect accounting?

An EFA often results in capitalization of the equipment and recording a liability; specifics depend on contract wording and accounting rules.

Are there recommended lenders for equipment financing?

Banks, credit unions, captive equipment lenders, and specialized equipment finance companies all offer options; consider quotes from multiple providers.