Equipment financing is designed specifically for the purchase of business equipment. Your business makes payments towards what you borrow over time and once the debt is repaid, you own the equipment free and clear. With certain types of equipment financing, the equipment itself serves as collateral so that if you default, the lender assumes ownership.

Depending on how the financing agreement is structured, the lender may impose a blanket lien or require a personal guarantee. A blanket lien allows the lender to lay claim to your business assets, including the equipment itself if you default. A personal guarantee does the same with regard to your personal assets so it’s important to understand what you’re agreeing to before you borrow.

When you need equipment, you don’t necessarily have to buy it—you could lease it instead. This means you’re essentially paying the equipment’s owner rent each month just as you would if you were leasing office or retail space for your business. At the end of the lease term, you can choose to renew your agreement or you may even be able to buy the equipment outright.

Leasing offers an advantage over financing in that you’re not required to offer any sort of down payment to obtain the equipment the way you might be expected to with a loan. Generally, you’re not bound by any collateral, lien or personal guarantee requirements. It may also be easier to qualify for a leasing arrangement than financing if your business or personal credit are less than stellar.

There is a potential drawback, however, in terms of the cost difference. Leasing equipment over the long-term means you’re not locked in as far as ownership but you could end up paying more to rent than you would by purchasing the equipment instead.

Small business owners have multiple financing avenues they can use to get the equipment they need. Deciding which one is the best fit ultimately depends on several factors, including:

• Your personal and business credit scores
• How long you’ve been in business
• Your annual business revenues
• The desired loan amount
• Your preferred repayment terms

Best for: Newer businesses that need equipment financing to expand operations.

An equipment loan most closely parallels the definition of equipment financing mentioned earlier. The equipment acts as collateral for the loan and it’s possible to get up to 100% financing, although some lenders may require a small down payment.

Repayment periods can be as short as 36 months or stretch out over a period of 10 years or more, based on how much you’re borrowing. Loan limits can go as high as the cost of the equipment and the annual percentage rate for equipment loans can be as low as 6%.

On the plus side, equipment loans can be funded fairly quickly, often in as little as two business days. Since many equipment loan and term loan providers operate within the online sphere only, rather than having a physical location, underwriting is often much more streamlined. It’s possible to fill out an application, upload documents such as financial statements or tax records and get an approval decision within 24 hours or less.  With a traditional bank, you may be waiting days or even weeks for your application to go through underwriting. Perfect credit isn’t a requirement of obtaining an equipment loan. Lenders do, however, usually require you to be in business for at least one year before applying so you may have a tougher time qualifying if you’re still in the startup phase.

Best for: Established businesses with consistent revenue that want to borrow up to $5 million.

Term loans are another possibility for small business owners who need quick access to cash for an equipment purchase. As the name suggests, term loans are repaid over a set period of time similar to a mortgage or car loan. Annual percentage rates are lower compared to those associated with equipment loans and they may be fixed or variable.

Term loans can be secured or unsecured, based on how much you’re borrowing. If you don’t want to use the equipment as collateral, you may have to offer up another business asset as a substitute.

While term loan lenders can have higher credit standards than equipment loans that can work to your advantage if you’re able to leverage a higher credit score to qualify for a lower interest rate. You may also be able to snag a lower origination fee, which can reduce the cost of borrowing even further. A difference of even one percentage point, either in the APR or the origination fee, could save you thousands over the course of the loan repayment term.

Like equipment loans, it’s possible to receive the funds in just a few days thanks to the streamlined application and approval process that online lenders like Rapid capital offer. That efficiency is yet another reason why a term loan may be a more attractive option than one of the alternatives for business owners with a strong credit history.

Best for: Businesses that want fast, flexible equipment funding.

A business line of credit is similar to a personal or home equity line of credit in that the bank makes a certain amount of money available to you that you can draw on again and again. It’s possible to obtain a line of credit of up to $1 million if you own an established business that has a good track record and you’ve got an good credit.

Business lines of credit can be repaid over a period of a few months or have terms that stretch out up to six years. Funding can be completed in a matter of days and a lower credit score generally isn’t a major roadblock to approval. It does, however, mean you’ll pay more in interest.

That’s where business lines of credit lose some of their luster compared to other financing choices when you need to buy equipment. Rates can easily be higher, which can make your equipment much more expensive over time. That’s because a business line of credit is designed to be used in the short-term to cover temporary cash flow gaps rather than large, one-time expenses.

For instance, you could draw on your line of credit to cover payroll one month and pay it back the next or use it to stock up on inventory when business is slow. While a line of credit can offer easy access to cash for an equipment purchase, that convenience often comes at a cost in the form of a higher interest rate.  So, let us help you choose prudently and wisely.