When business owners hear “equipment financing,” they often think any loan used to buy equipment qualifies. But that’s not quite right — and misunderstanding the difference can cost you thousands.
What Equipment Financing Really Means
True equipment financing is a structured loan or lease in which the funds go directly to the vendor selling the equipment. The equipment itself serves as collateral, and if you default, the lender can repossess it. This setup reduces risk for the lender, which is why equipment financing typically comes with lower rates and longer terms than unsecured working capital loans.
There are a few types:
- Equipment Finance Agreement (EFA): Similar to a loan. You own the equipment, make monthly payments, and the lender files a lien until it’s paid off.
- $1 Buyout Lease: Technically a lease, but functions like a loan. You lease the equipment and purchase it for $1 at the end.
- Fair Market Value (FMV) Lease: True lease where you return the equipment or buy it at market value after the term ends.
In all these cases, the lender pays the equipment vendor directly, not the borrower.
What Equipment Financing Is Not
Many online lenders advertise fast business loans that can be used to buy equipment. But these are cash-out loans, not equipment financing.
Here’s the key difference:
- With a true equipment loan, the lender controls how the funds are used.
- With a cash-out loan, you receive the funds directly and can use them however you want.
That freedom comes at a price. Cash-out loans are typically:
- Shorter-term (even if 24 months is advertised, most loans are 6–18 months)
- More expensive (often costing 15–45 cents on the dollar)
- Unsecured or only covered by a blanket lien, not tied to the equipment
So while it might be tempting to take fast money and buy what you need, you’re likely overpaying by a lot — and taking on more risk.
Why This Distinction Matters
There’s another important layer to this conversation: how financing is marketed. Many lenders that only offer cash-out loans still create content on their websites about “equipment financing.” The charitable view is that they’re trying to educate business owners about all available options — and what might be appropriate based on unique needs and circumstances.
But a more cynical (and arguably realistic) interpretation is that this content is there for SEO purposes — to rank for keywords and drive traffic. In some cases, it may even blur the lines intentionally, leading borrowers to believe they’re getting true equipment financing when they’re not.
That’s why it’s on the borrower to be aware. You don’t need to be a lending expert, but you do need to ask the right questions and understand the structure of what you’re signing.
If you’re planning to finance equipment, it’s critical to understand the type of loan you’re getting. A cash-out loan is easier to qualify for and faster to fund, but much more expensive and not designed for long-term asset purchases.
Equipment financing is purpose-built for acquiring revenue-generating assets. It’s often cheaper, more structured, and can preserve working capital for other business needs.
Before signing any financing deal, ask:
- Will the funds go directly to the vendor?
- Is the equipment collateral for the loan?
- Is this a lease or loan structure tied to the asset?
If the answer to these is no — you’re not getting equipment financing.
Ready to Find the Right Equipment Financing Partner?
If you’re looking for real equipment financing — not an expensive cash-out loan — Diogenes can help you cut through the noise. Launch the chatbot, answer a few questions, and get matched with lenders that specialize in true equipment financing, not the bait-and-switch kind.
Stay tuned for the next post: How Equipment Financing Is Underwritten — and What Lenders Look For.
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