Term loan vs equipment financing
Both can buy the same piece of equipment. They differ in what secures the money, how long you pay, how much cash you put down and what you can spend the funds on. Here is one purchase run through both.
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Updated October 13, 2026 · Merchant Fund Express
If the money is only for a specific machine that will keep earning for years, equipment financing usually fits better: the equipment itself secures the deal, the term can run closer to the life of the machine and the monthly payment is lower. If you also need cash for installation, tooling, training or the slow weeks while the machine ramps up, or the equipment is used, custom or hard to resell, a term loan fits better because the funds are not tied to one invoice from one vendor.
The trade-off is simple to state: equipment financing spreads the cost thinner over a longer time, and a term loan costs less in total when it is paid off faster, but its payment is heavier while it runs.
| Term loan | Equipment financing | |
|---|---|---|
| What the money buys | Anything the business needs, including the machine | The equipment on the vendor quote, sometimes with delivery and installation |
| What secures it | Usually a lien on business assets and a personal guarantee | Mostly the equipment itself; a guarantee can still apply |
| Down payment | Often none | Often 10% to 20% of the price, depending on the file and the equipment |
| Term | Shorter in most offers | Often matched to the useful life of the equipment |
| Who pays the vendor | You do, from the funds | The funder usually pays the vendor directly |
| Ownership | You own the equipment from day one | You own it, with the funder holding a lien until payoff |
A machine shop, 4 years in business, wants a $120,000 CNC machine on a vendor quote. Its deposits average $65,000 a month across 14 deposits, its average balance is about $9,000, the owner’s FICO is 690 and there are no existing advances or loans. The machine would be delivered and paid for on Monday, November 2, 2026.
| Term loan | Equipment financing | |
|---|---|---|
| Amount financed | $120,000 | $108,000 after a $12,000 down payment (10%) |
| Assumed rate and term | 14% APR, 24 months, 0% origination | 11% APR, 48 months |
| Monthly payment | $5,761.55 | $2,791.32 |
| First payment | December 2, 2026 | December 2, 2026 |
| Last payment | November 2, 2028 | November 2, 2030 |
| Total of payments | $138,277.10 | $133,983.19 |
| Cash out of pocket including down payment | $138,277.10 | $145,983.19 |
| Cost of the money | $18,277.10 | $25,983.19 |
| Payment as a share of $65,000 monthly deposits | 8.9% | 4.3% |
On these assumptions the term loan costs $7,706.09 less in total because it is repaid in half the time, but it takes $2,970.23 more out of the account every month for two years. The equipment financing leaves more breathing room each month and keeps the shop paying for the machine while the machine earns. Which one is right depends on whether the shop’s margin can carry $5,761.55 a month comfortably from the first payment, before the new machine is fully productive.
All figures in worked examples are illustrations of the arithmetic, not offers or quotes. Real terms depend on your file and the funder.
A business with a long, clean record that wants to pay the equipment off fast, needs part of the money for things a vendor quote will not cover, or is buying used equipment. Our published Tier 1 for a term loan asks for 3+ years, a 650+ FICO, $25,000 a month in revenue, 8+ deposits a month, and the term loan must sit in first position.
A purchase from an established vendor, equipment with a clear resale value and a business that would rather keep the monthly payment low and match it to the years the machine will earn.
A shop whose deposits cannot carry either payment yet, one that already has two positions open, or one with frequent negative days. Clean up the account for a few months, or look at a cheaper used machine.
Construction businesses follow a separate rule on our second tier (5 years, $500,000+ in monthly revenue, 10+ deposits and a commercial location). Read the requirements before assuming a line applies.
No tax returns are needed for a typical first review. Full financials are usually requested only above $250,000.
Run your own numbers in the term loan payment calculator and check the monthly figure against your deposits with the payment burden calculator. Read more on equipment financing, business term loans and equipment financing for machine shops. When you are ready, the application takes about five minutes, and you see the amount, schedule and total repayment before you sign.
Not always. Its rate is often lower because the equipment secures it, but a longer term can mean more total cost. In the example the lower rate still cost more in dollars because it ran 48 months instead of 24.
Equipment financing often asks for 10% to 20% down, depending on the file and the equipment. A term loan often needs none, because the funds are not tied to one item.
Sometimes, but used or custom equipment is harder to value. A term loan is often the easier route for it.
Yes. A term loan can cover any business purpose, which is why it suits purchases with costs beyond the vendor quote.
We consider FICO from 500, and 600+ opens better offers. A term loan through our Tier 1 asks for 650+.
Same-day decision. Applying takes a few minutes and will not affect your credit score.
