When running or starting a business, access to capital is essential. Two common financing options are equipment financing and a business line of credit (LOC). While both provide funding, they serve different purposes, have different structures, and carry different risks.

Choosing the wrong option can increase costs, limit flexibility, or create unnecessary financial pressure. This detailed guide explains how each works, qualification requirements, interest rates, repayment structures, real examples, advantages, risks, and how to decide which is right for your business.

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What Is Equipment Financing?

Equipment financing is a loan specifically used to purchase business equipment. The equipment itself serves as collateral for the loan.

Common uses:

• Construction machinery
• Restaurant kitchen equipment
• Medical devices
• Manufacturing tools
• Commercial vehicles
• Technology hardware

Key features:

• Loan tied directly to equipment purchase
• Fixed repayment schedule
• Equipment secures the loan
• Ownership transfers after loan repayment

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How Equipment Financing Works

Example:

Equipment cost: $80,000
Down payment: 10% ($8,000)
Loan amount: $72,000
Interest rate: 8%
Term: 5 years

Monthly payment ≈ $1,460
Total interest ≈ $15,600

If the business defaults, the lender repossesses the equipment.

Because the loan is secured by the asset, interest rates are typically lower than unsecured financing.

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What Is a Business Line of Credit?

A business line of credit is a revolving credit facility that allows you to borrow up to a maximum limit and repay as needed—similar to a credit card.

Example:

Credit limit: $100,000
Borrow $30,000
Interest charged only on $30,000

As you repay, credit becomes available again.

Key features:

• Flexible withdrawals
• Pay interest only on amount used
• Revolving structure
• Often variable interest rate

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How Business Line of Credit Works

Example:

Credit limit: $75,000
APR: 10%

You draw $25,000 for inventory.

Monthly interest payment ≈ $208 (interest-only example)

If you repay $10,000, available credit increases to $60,000 again.

This flexibility makes LOC useful for managing cash flow.

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Key Structural Differences

Feature	Equipment Financing	Business Line of Credit
Purpose	Purchase equipment	Flexible working capital
Structure	Installment loan	Revolving credit
Collateral	Equipment itself	Often unsecured or general lien
Interest Type	Usually fixed	Often variable
Flexibility	One-time purchase	Ongoing access
Risk	Asset repossession	Credit limit reduction

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When Equipment Financing Is Better

Equipment financing is ideal when:

• You need specific machinery or tools
• Cost is fixed and known
• Equipment generates revenue
• You want predictable payments
• You prefer fixed interest rate

Example:

A construction company purchasing a $150,000 excavator expected to generate $10,000 monthly revenue.

Fixed payments allow structured budgeting.

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When Business Line of Credit Is Better

A business line of credit works better when:

• Cash flow fluctuates
• You need working capital
• Expenses vary monthly
• You manage seasonal sales
• You need short-term flexibility

Example:

Retail store preparing for holiday inventory surge.

Draw $40,000 for inventory, repay after sales revenue increases.

LOC adapts to changing needs.

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Interest Rate Comparison (2026 Typical Ranges)

Equipment Financing:

• 6%–12% for established businesses
• Higher rates for startups

Business Line of Credit:

• 8%–25% depending on credit profile
• Variable rates common

Equipment financing usually offers lower rates due to secured nature.

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Approval Requirements

Equipment Financing:

• Credit score: Often 650+ preferred
• Business financial statements
• Equipment quote or invoice
• Time in business (often 1–2 years)

Startups may qualify if equipment has strong resale value.

Business Line of Credit:

• Credit score: 680+ preferred
• Revenue history required (often $100,000+ annually)
• Minimum time in business (6–24 months)
• Strong cash flow

LOC approval is heavily based on consistent revenue.

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Real Scenario Comparison

Business needs:

• $50,000 for new machinery
• $30,000 for seasonal inventory

Option 1: Equipment Financing

$50,000 at 7% for 5 years
Monthly payment ≈ $990

Option 2: Business Line of Credit

Draw $80,000 at 10%
Interest-only monthly ≈ $667 initially

However, LOC rate may increase and full repayment required depending on terms.

Equipment financing isolates equipment purchase without mixing working capital expenses.

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Risk Considerations

Equipment Financing Risks:

• Equipment may depreciate faster than loan balance
• Obsolete technology risk
• Repossession if payments missed

Business Line of Credit Risks:

• Variable interest rates
• Overuse leads to debt cycle
• Lender may reduce credit limit
• Cash flow dependency

LOC requires strong financial discipline.

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Tax Considerations

Equipment financing may offer tax benefits:

• Section 179 deduction
• Depreciation benefits
• Interest expense deductions

Business line of credit interest may also be deductible, but it does not provide depreciation benefits.

Consult tax professional for specifics.

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Cash Flow Impact

Equipment Financing:

• Fixed monthly obligation
• Easier forecasting

Business Line of Credit:

• Payment depends on usage
• More flexibility
• Can create unpredictability

If your business struggles with cash flow volatility, LOC may provide breathing room.

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Which Option Is Safer for Startups?

For startups with no stable revenue:

Equipment financing may be easier if equipment has resale value.

LOC approval is harder without revenue history.

Startups often begin with equipment loans instead of credit lines.

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Growth Strategy Comparison

Equipment financing supports growth through asset acquisition.

Business line of credit supports operational stability and short-term growth opportunities.

For expansion:

Many established businesses use both strategically.

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Example of Combining Both

Manufacturing company:

• Equipment financing for $200,000 machinery
• $100,000 business line of credit for raw materials

Equipment generates production capacity.
LOC supports supply chain needs.

This balanced strategy optimizes both stability and flexibility.

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Cost Comparison Over 5 Years

Scenario:

Borrow $60,000

Equipment Loan at 7% (5 years)
Total interest ≈ $11,200

LOC at 12% average utilization
Interest cost depends on draw duration
Could exceed $18,000 over similar period

Lower rates generally favor equipment loans for long-term assets.

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Common Mistakes to Avoid

• Using LOC for long-term asset purchases
• Financing outdated equipment
• Overleveraging with revolving credit
• Ignoring variable rate risk
• Failing to match loan term with asset life

Match financing type with business purpose.

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Decision Framework

Choose Equipment Financing If:

• You are purchasing specific equipment
• Asset will generate revenue
• You want fixed payments
• You prefer lower interest rates

Choose Business Line of Credit If:

• You need ongoing flexibility
• Cash flow fluctuates
• Expenses vary
• You want emergency backup capital

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Final Verdict

Equipment financing and business lines of credit serve different financial purposes.

Equipment financing is structured, predictable, and best for purchasing income-generating assets.

A business line of credit is flexible, revolving, and best for managing short-term operational needs.

The smartest approach for many businesses is not choosing one over the other—but understanding when to use each strategically.

Matching financing type to business purpose reduces cost, lowers risk, and improves long-term financial stability.