Summary
- Equipment lines of credit let you borrow only what you need for equipment purchases and pay interest only on what you use.
- Unlike term loans, you can reuse the credit line after paying it down, making it ideal for businesses with ongoing equipment needs.
- Learn how equipment lines of credit work, how to qualify, and how to decide if they are right for your business.
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If your business needs ongoing access to funds for purchasing, repairing, or upgrading essential tools and machinery — without locking you into a lump-sum loan — an equipment line of credit (LOC) can help.
In this guide, you’ll learn how these flexible credit lines work and if it’s right for you.
What is an equipment line of credit and how does it work?
An equipment line of credit gives your business flexible access to funding specifically for equipment purchases, repairs, or upgrades. Think of it like a credit card with a pre-approved credit limit, but designed exclusively for equipment needs.
Here's how it works:
- Once approved, you receive a credit limit based on your business financials and creditworthiness.
- You can draw funds as needed for equipment purchases, paying interest only on the amount you actually use.
- After you pay down the balance, that credit becomes available again.
The equipment itself may serve as collateral, which means the lender can repossess it if you default. This collateral requirement may allow lenders to offer more competitive rates than unsecured (no collateral) financing options.
Equipment lines of credit often offer flexible draw periods (usually 1–3 years) followed by repayment periods where you can no longer access new funds and must pay down the balance.
Equipment LOC vs. equipment term loan
The key difference between a line of credit and a term loan comes down to flexibility and timing.
Equipment term loans provide a lump sum upfront with fixed monthly payments over a set period. Equipment lines of credit give you ongoing access to funds as your equipment needs change.
Equipment term loan | Equipment line of credit |
Receive full amount of funding at closing | Draw funds (up to credit limits) when needed |
Regular payments required through term of the loan | May allow interest-only payments during draw period |
Entire loan amount accrues interest | Pay interest only on amounts borrowed |
One-time approval; new equipment requires new approval | Can reuse credit line as funds are paid back (during draw period) |
Helpful for large equipment purchases for specific amounts | Helpful for ongoing equipment acquisition or where full cost is yet unknown |
For example, a construction or IT business might prefer a line of credit to handle equipment replacements throughout the year, while a manufacturer buying a large piece of equipment may choose a term loan to pay for that equipment over a specific time period.
Typical rates, fees, and limits (2025 update)
Equipment line of credit terms vary significantly based on your business profile and the lender you choose.
Interest rates
- Banks and credit unions: 5% to 15% APR for strong credit
- Online lenders: 10% to 30% APR
- Alternative lenders: 15% to 35% APR
Credit limits
- Startup businesses: $10,000 to $100,000
- Established businesses: $50,000 to $5 million
- Enterprise businesses: $1 million to $10 million+
Common fees
- Origination fees: 1% to 3% of credit limit
- Draw fees: $25 to $100 per withdrawal
- Annual fees: $100 to $500
- Early repayment penalties: 1% to 3% of outstanding balance
The rates and fees your business will pay depend heavily on factors like annual revenue, time in business, business credit scores and/or personal credit scores, and the type of equipment you're financing.
Who qualifies for an equipment LOC?
While we’ve included some overall guidelines here, please understand these aren’t set in stone. However, they can help you better evaluate an offer for financing to see whether it may be a fit.
Every lender has its own qualification requirements, so just because you don’t meet the following requirements for one lender doesn’t mean you can’t find an equipment line of credit or alternatives, like an equipment lease or loan.
Minimum requirements
- Personal credit score: 500+ for alternative lenders, 700+ for prime lenders
- Business credit score: Varies by lender, some only check for negative information
- Time in business: 2+ years, though some online lenders accept 6 months
- Annual revenue: $100,000 to $250,000 minimum
- Debt-to-income ratio: Under 40%
Documentation you may need
- Bank statements (3–6 months)
- Equipment quotes or invoices
- Business licenses and registrations
- Business and personal tax returns (2–3 years)
- Financial statements (profit and loss, balance sheet)
Factors that may strengthen your application
- Growing revenues documented with business bank statements
- Strong payment history with existing lenders
- Low debt-to-income ratios
- Established relationships with equipment vendors
- Clear business plan for equipment use
Newer businesses or those with credit challenges might still qualify through online lenders, though they'll typically face higher rates and lower credit limits.
Leading equipment LOC lenders
Lender category | Examples | Target borrower profile | Typical financing amount | Key pros | Key cons |
Commercial banks | Wells Fargo, U.S. Bank, Bank of America | Established businesses (2+ years), strong credit, existing banking clients | $250,000–$5,000,000+ | Competitive rates, integrated services, handles large transactions | Slow process, stringent underwriting, currently retreating from the market |
Captive finance companies | John Deere Financial, Caterpillar Financial Services | Businesses purchasing the parent company's specific brand of equipment | Varies by equipment cost | Product expertise, integrated sales process, flexible payment structures | Tied to a single brand, may not offer the lowest overall cost of capital |
Independent or alternative lenders | American Capital, Crest Capital, Balboa Capital | SMBs including younger businesses with non-traditional credit profiles | $10,000–$500,000 | Speed (funding in 24–48 hrs), flexible qualifications, high approval odds | Higher interest rates, potentially shorter repayment terms |
SBA lenders | SBA preferred lenders | Qualified small businesses unable to secure conventional financing on reasonable terms | Up to $5,000,000 | Long repayment terms, low down payments, accessible to a wider range of businesses | Extremely slow and burdensome application process, requires blanket liens |
There are several types of financing companies that offer equipment financing, and each has unique advantages depending on your business needs and qualifications.
Major commercial banks
Banks like U.S. Bank, Bank of America, and Wells Fargo represent the largest segment of equipment financing, though banks generally have been pulling back on this type of financing in recent years.
Traditional financial institutions often offer competitive rates and terms for businesses with strong credit, significant revenues, and established banking relationships. However, the approval process can take time, and qualification requirements can be challenging for newer businesses or those that need quick funding.
Captive finance companies
These companies provide a different approach entirely. Companies like Caterpillar Financial Services and John Deere Financial specialize exclusively in financing their parent company's equipment.
They really know their products and their market, and may be able to offer flexible payment structures that fit your business cycles — like seasonal payment plans for agricultural equipment. The trade-off is more limited flexibility, as you're locked into financing one brand of equipment, and promotional rates may come with higher equipment prices.
Independent and alternative lenders
Alternative lenders have emerged as the fastest-growing segment in equipment financing. These lenders excel at speed and flexibility, often making credit decisions within hours and funding within days.
They may be able to work with businesses that have fair credit or need to finance used equipment. However, this convenience may come with higher interest rates and shorter repayment terms than traditional banks.
SBA lenders
SBA lenders offer government-backed financing through programs like SBA 7(a) loans, which may be used for equipment purchases.
These loans provide access to capital for qualified businesses that might not qualify for conventional financing, with longer repayment terms and competitive rates. The downside is a lengthy approval process that can take 60-90 days and personal guarantees.
Your overall choice between these kinds of lenders depends on balancing factors like approval speed, interest rates, credit requirements, and the specific type of equipment you're financing.
Pros and cons of an equipment LOC
Pros
- Flexible access to funds: Draw only what you need, when you need it, rather than borrowing a large lump sum.
- Pay interest only on what you use: You’ll pay interest on outstanding balances, not the entire untapped credit line.
- Revolving credit: Once you pay down the balance, you can usually access those funds again for future equipment needs. (Draws may be limited in some cases.)
- Preserve working capital: Avoid large upfront equipment purchases that drain your cash reserves.
- Equipment serves as collateral: The collateral may mean better rates than unsecured financing options.
- Build business credit: Regular, on-time payments can strengthen your business credit profile over time if reported to business credit bureaus.
Cons
- Variable interest rates: Many lines of credit have adjustable rates that can change over time, which may be positive or negative, depending on economic trends.
- Equipment restrictions: Use funds may be restricted to approved equipment purchases, not general business expenses.
- Collateral requirements: The lender may be able to repossess equipment if you default on payments.
- Draw fees: Some lenders charge fees each time you access funds from your credit line.
- Credit limit fluctuations: Lenders may reduce your available credit if your business performance declines.
- Shorter terms than equipment loans: Lines of credit typically have shorter repayment periods than traditional equipment financing.
Application checklist
Ready to find an equipment LOC or loan? Follow these steps to help streamline your equipment line of credit application:
1. Check your credit scores
Review both personal and business credit reports for errors and credit scores to help understand where you and your business stand before applying. Sign up for Nav Prime to see your business and personal credit scores in one place.
2. Gather financial documentation
It’s always a good idea to have documents ready to provide to lenders if you are asked for them. These include the most recent three to six months of business bank statements, and two to three years of most recent tax returns (personal and business). Make sure your bookkeeping is up to date so you or your accounting professional can produce financial statements if asked.
3. Prepare equipment details
Have quotes, specifications, and vendor information ready for the equipment you plan to purchase.
4. Research lenders
Compare rates, terms, and fees from banks, credit unions, and online lenders to find the best fit.
5. Complete applications
If you apply to multiple lenders, you may want to do that in a two-week window to help minimize the impact of hard inquiries on your personal credit.
6. Review terms carefully
If your application is approved, read the terms carefully. Pay attention to draw fees, repayment schedules, and any restrictions on equipment types. Find out whether you are agreeing to a personal guarantee, and what type of UCC lien the lender will file.
7. Pay on time
Once you are approved, make sure you pay on time. If your line of credit is reported to business credit bureaus, those on-time payments can be very helpful when it comes to establishing business credit. (Plus you may save money by avoiding late fees.)
Frequently asked questions
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Kat Cox
Kat Cox works to provide answers to the questions small business owners have about how to set up, run, or fund their businesses. When she’s not writing blogs, articles, short fiction, or (kind of bad) French poetry, Kat can be found lacing up her tennis shoes for a run or walk with her pup or scouting for the best karaoke spot in Austin, Texas.