Equipment Financing Glossary
Plain-English definitions for the terms you will see in equipment loan paperwork, lender comparisons, and tax planning. Skip to a letter or use Ctrl+F to find a term.
A
- Acquisition Cost
- The full upfront cost of equipment including purchase price, delivery, installation, and any required training. Most equipment financing programs allow you to include some or all soft costs in the financed amount.
- Amortization
- The schedule of monthly payments that pays down both principal and interest over the loan term. Equipment loans typically use straight-line amortization with equal monthly payments.
- Annual Percentage Rate (APR)
- The true annual cost of borrowing, including interest and most fees, expressed as a percentage. Use APR to compare lenders honestly. A 1.25 factor rate sounds low but converts to roughly 25% APR over 12 months.
- Application-Only Program
- A streamlined approval process for loans typically under $250,000 that requires only an application, bank statements, and ID. No tax returns or full financial statements needed. Most alternative lenders offer this.
B
- Balloon Payment
- A larger final payment due at the end of an equipment loan or lease. Reduces monthly payments during the term but creates a refinancing or payoff event at maturity. Common in some commercial vehicle financing.
- Bonus Depreciation
- A first-year tax deduction allowing businesses to write off a percentage of new and used equipment cost beyond Section 179. The 2026 rate is 60%, scheduled to decline to 40% in 2027 and 20% in 2028 before expiring.
- Broker Network
- A lending platform that does not fund loans directly but instead shops your application to multiple lender partners. Can offer rate competition but adds a middle layer that often slows funding versus a direct lender.
C
- Capital Lease
- A lease structured like a loan, with the lessee owning the equipment at end of term for a nominal amount (often $1). Treated as an asset purchase for tax and accounting purposes, qualifying for Section 179.
- Collateral
- The asset securing a loan, which the lender can repossess if you default. In equipment financing, the equipment itself is the primary collateral. Loans over $350,000 sometimes require additional collateral.
- Commercial Equipment Financing
- Loans or leases for business equipment, distinct from consumer equipment loans. Typically requires the equipment to be used in business operations.
- CSP (Credit Score Profile)
- How a lender groups borrowers by credit tier for pricing purposes. Common tiers: 720+ (excellent), 680-719 (good), 640-679 (fair), 580-639 (subprime), under 580 (deep subprime).
D
- Debt Service Coverage Ratio (DSCR)
- A measure of cash flow available to pay debt, calculated as net operating income divided by total debt service. Lenders typically want 1.25 or higher. A DSCR of 1.0 means your business generates exactly enough cash to cover the payment, with no margin for error.
- Direct Lender
- A lender that funds loans with their own capital rather than brokering to other lenders. Examples: Cardiff, Crest Capital, Balboa Capital. Typically faster and more transparent than broker networks.
- Documentation Fee
- A flat fee charged by some lenders to cover paperwork processing. Typically $250 to $1,500 regardless of loan size. Ask if this is included in the APR or charged separately.
- Down Payment
- Cash paid upfront, reducing the financed amount. Traditional bank loans require 10-20% down. Alternative lenders like Cardiff offer $0 down programs that finance 100% of equipment cost.
E
- EFA (Equipment Finance Agreement)
- A loan structure where you take immediate ownership of the equipment and pay it off through monthly installments. Functions like a loan but is documented as a finance agreement. Qualifies for Section 179.
- Effective Annual Rate
- The true annual cost of a loan accounting for compounding. Useful for comparing loans with different payment frequencies (daily, weekly, monthly).
- Equipment Loan
- A term loan specifically for purchasing business equipment, with the equipment as collateral. Distinct from working capital loans, lines of credit, or MCAs.
- Escrow
- Funds held by a third party until specific conditions are met. Rare in equipment financing but sometimes used for large transactions or when vendor delivery is delayed.
F
- Factor Rate
- A multiplier (like 1.25 or 1.35) used by MCA and some short-term lenders to express total repayment. A $50,000 advance at 1.30 factor rate means $65,000 total repayment. Always convert factor rates to APR for honest comparison.
- Fair Market Value (FMV) Lease
- A lease structure where, at end of term, you can buy the equipment at its current market value, return it, or renew. Lowest monthly payments of any lease type. Best for equipment that depreciates quickly or that you may want to upgrade.
- Fixed Rate
- An interest rate that does not change during the loan term. Standard for equipment financing. Distinguishes from variable rates that fluctuate with the prime rate.
- Funding
- The point at which the lender wires loan proceeds to the equipment vendor. Distinct from approval, which is the credit decision. Funding usually happens 1 to 5 days after closing documents are signed.
G
- Guarantor
- A person (usually the business owner) who personally agrees to repay the loan if the business cannot. Most equipment loans require a personal guarantee from anyone owning 20% or more of the business.
H
- Hard Credit Pull
- A credit inquiry that appears on your credit report and may temporarily lower your score by a few points. Required for final approval at most lenders. Distinguished from soft pull, which is invisible to credit scoring.
I
- Independent Lender
- A non-bank lender that funds equipment loans, typically with faster underwriting and broader credit criteria than traditional banks. Examples include Cardiff, Crest Capital, Balboa Capital, and National Funding.
- Industry Specialist
- A lender or lending program focused on specific equipment types or industries. Often offers better rates and faster approvals for in-scope equipment due to better resale market knowledge.
- Installment Loan
- A loan repaid in fixed periodic payments over a set term. Equipment loans are typically installment loans with monthly payments.
- Interest-Only Period
- A loan structure that defers principal payments for a set period, typically 3 to 6 months. Used when equipment requires time to generate revenue before payments begin.
L
- Lease
- A contract giving you use of equipment for a set period in exchange for monthly payments. Differs from a loan in that you may not own the equipment at term end. Several lease structures exist with different tax and accounting treatment.
- Lessee
- The business using leased equipment and making lease payments.
- Lessor
- The party that owns the leased equipment and receives payments.
- Line of Credit
- A revolving credit facility you can draw on as needed and repay over time. Different from a term loan in that you pay interest only on what you use. Useful for working capital, not equipment.
- Loan-to-Value (LTV)
- The ratio of loan amount to equipment value. A 100% LTV loan finances the full equipment cost; 80% LTV means the borrower covers 20% as down payment. Higher LTV usually means higher rates.
M
- Maturity Date
- The date when the final loan payment is due and the loan is fully paid off.
- Merchant Cash Advance (MCA)
- Not a loan but a purchase of future receivables. The funder advances cash in exchange for a fixed percentage of daily credit card sales until a set amount is repaid. Effective APRs often exceed 60%. Frequently confused with equipment loans but does not qualify for Section 179.
N
- Net Operating Income (NOI)
- A business's income after operating expenses but before debt service and taxes. Used in DSCR calculations.
O
- Operating Lease
- A lease structured so payments are expensed monthly rather than capitalized as an asset. Used when the lessee does not want ownership and prefers off-balance-sheet treatment. FMV leases are typically operating leases.
- Origination Fee
- A fee charged by the lender to set up the loan, typically 1 to 5 percent of the loan amount. Sometimes financed into the loan, sometimes paid upfront. Always factor into APR for comparison.
P
- Personal Guarantee
- A commitment by the business owner to personally repay the loan if the business defaults. Standard requirement for equipment loans, especially under $500,000.
- Prepayment Penalty
- A fee charged for paying off a loan before the maturity date. Some equipment loans have no prepayment penalty; others charge 1 to 3 percent of the remaining balance. Always confirm in writing.
- Principal
- The amount of money borrowed, before interest. Monthly payments include both principal reduction and interest.
- PUT Option Lease
- A lease structure with payments calculated on a percentage of equipment value (typically 90%) and a residual buyout at end of term (typically 10%). Balances lower monthly payments with eventual ownership.
R
- Residual Value
- The estimated value of equipment at end of lease term. Used to set FMV lease payments. Lower residuals mean higher monthly payments but better buyout terms.
S
- Sale-Leaseback
- A transaction where you sell owned equipment to a lender and lease it back, converting equity into cash while keeping the equipment in service. Useful for unlocking working capital from owned assets.
- SBA 7(a) Loan
- A Small Business Administration-guaranteed term loan up to $5 million for general business purposes including equipment. Lower rates than alternative lenders but longer approval timeline (60-90 days typical).
- SBA 504 Loan
- An SBA-backed loan specifically for major fixed asset purchases like real estate or large equipment. Fixed rates tied to Treasury bonds, terms up to 25 years.
- Section 179
- A U.S. tax code provision allowing businesses to deduct the full cost of qualifying equipment in the year it is placed in service, rather than depreciating over 5 to 7 years. The 2026 limit is $1,160,000 with a $2,890,000 spending cap.
- Secured Loan
- A loan backed by collateral. Equipment loans are secured loans, with the equipment serving as collateral. The opposite is an unsecured loan, which has no specific collateral and typically carries higher rates.
- Soft Costs
- Non-equipment expenses tied to acquiring or installing equipment, including shipping, installation, training, and software licenses. Many lenders allow soft costs to be financed alongside the equipment.
- Soft Credit Pull
- A credit inquiry that does not affect your credit score and is not visible to other lenders. Used by lenders like Crest Capital to provide rate quotes before formal application.
T
- Term
- The length of the loan or lease, expressed in months. Equipment loans typically run 24 to 84 months matched to equipment useful life.
- Title
- Legal ownership of the equipment. Some equipment requires titling (vehicles, large machinery). The lender may hold title as collateral during the loan term.
- Total Cost of Capital
- The all-in cost of borrowing, including interest, fees, and any prepayment costs. Use this for honest lender comparison rather than just APR.
U
- UCC-1 Filing
- A public record filed by the lender to perfect their security interest in the equipment. Standard practice that shows up on a business credit report. Filing fees of $25 to $200 are typically passed through to the borrower.
- Underwriting
- The lender's process of evaluating loan applications, including credit checks, financial review, and risk assessment. Determines approval, rate, and loan terms.
- Unsecured Loan
- A loan with no specific collateral, relying solely on the borrower's creditworthiness. Higher rates than secured loans. Not typical for equipment financing.
- Useful Life
- The estimated period during which equipment remains productive and valuable. Loan terms are typically matched to useful life so the equipment retains value as collateral.
V
- Vendor
- The seller of the equipment. Lenders typically pay the vendor directly via wire transfer upon funding, rather than giving cash to the borrower. Helps ensure the loan proceeds are used for the stated equipment purchase.
- Vendor Financing
- Financing arranged through the equipment seller, often in partnership with a specific lender. Convenient but rarely the most competitive rate. Always compare against independent lenders.
Missing a term?
Email support@equiprates.com and we will add it. We update this glossary regularly as new financing structures appear in the equipment lending market.