Equipment Loan vs. Line of Credit: Which Fits Your Business?

By the ShopFunders Team · Updated September 2026

You need capital to buy new machinery or fill a cash gap—but the difference between an equipment loan and a line of credit will change what you actually pay and how fast you get funded. Here's how to pick the right one.

What an Equipment Loan Is (and Isn't)

An equipment loan is a term loan that's secured by the specific machinery, vehicle, or assets you're buying. You borrow a fixed amount, repay it over a set period (usually 3–7 years for equipment), and the lender holds a lien on that equipment until the debt is paid off.

Because the loan is secured—the bank can repossess the equipment if you don't pay—lenders offer lower interest rates. You get a predictable monthly payment and a clear end date. You're not paying interest on money you don't use.

The downside: you're locked into that loan amount. If you need $50,000 for a printing press and interest rates drop next year, you're still carrying that original rate. And if business slows, you still owe the monthly payment.

What a Line of Credit Is (and Isn't)

A line of credit (secured or unsecured) works like a credit card for your business. You're approved for a maximum borrowing amount—say $100,000—but you only pay interest on what you actually draw and use. You draw when you need it, pay it back, and can draw again.

That flexibility is huge. You draw $30,000 in January to cover payroll gaps, pay it down in March, then draw $20,000 in June for inventory. You're only paying interest on the balance you're carrying that month.

The catch: lines of credit typically carry higher interest rates than equipment loans (because they're usually unsecured), and the monthly payment can fluctuate. Some lenders also charge annual fees or set minimum draw requirements.

Cost Comparison: The Real Numbers

Let's say you need $75,000 to buy new equipment.

Equipment Loan: 9% APR, 5-year term = roughly $1,416/month, $84,960 total paid. Fixed, predictable, done in 60 months.

Line of Credit: 12% APR on a $100,000 limit. If you draw $75,000 and carry that balance for a year, you're paying $9,000 in interest annually. But if you only carry the full balance for 6 months and then reduce it to $30,000, you're paying around $4,650 that year.

Equipment loans cost less if you need a fixed amount for a fixed purpose. Lines of credit cost less if your borrowing need varies throughout the year. A home services company with seasonal cash gaps often saves money with a line of credit. A contractor who buys one big excavator saves money with an equipment loan.

When to Choose an Equipment Loan

• You're buying a specific asset: Vehicle, machinery, construction equipment, or IT hardware you'll use for years.
• You need a large, one-time amount: If you're financing $200K+ of equipment, a term loan offers better rates than a revolving line.
• You want predictable, fixed payments: Budgeting is easier when you know exactly what you'll pay each month for 60 months.
• You plan to keep the equipment long-term: Equipment loans reward you for owning assets; the cost per year drops as years go on.
• You want to preserve borrowing capacity: An equipment loan doesn't tie up your line of credit for ongoing operations.

When to Choose a Line of Credit

• Your cash flow is uneven: Seasonal businesses, consulting firms with uneven project billing, or retail with Q4 spikes benefit from drawing only when needed.
• You're covering operational gaps, not buying assets: Payroll shortfalls, inventory builds, supplier payment timing gaps—these are line-of-credit jobs.
• You might not need the full amount at once: You don't want to borrow and pay interest on $100K if you'll only use $40K the first month.
• Interest rates are volatile: A line of credit lets you minimize interest cost by paying down when cash improves; a term loan locks you in.
• You need speed and flexibility: Lines of credit often close faster than equipment loans, and you can redraw without reapplying.

What Lenders Check Before Approving Either One

For equipment loans: Lenders look at the equipment's resale value (they want to know they can recover money if they repossess), your business financials, credit score, and cash flow to ensure you can handle the monthly payment. A 670+ credit score and 6+ months of clean bank statements usually get you in the door. SBA loans can work here if you're buying equipment that qualifies.

For lines of credit: Lenders focus on your cash flow stability, business age (usually 1+ year), and credit history. They want to see that you have room in your monthly cash position to borrow and repay without choking the business. Personal guarantee is almost always required. Unsecured lines typically need stronger financials than secured equipment loans.

Both will want to see that the capital you're borrowing is actually going to grow revenue or reduce costs, not just plug a leak in a broken business model.

Frequently asked questions

Can I get an equipment loan for used equipment?

Yes, but it depends on the asset's age and condition. Most lenders will finance used equipment up to 5–10 years old, but interest rates may be slightly higher than for new equipment. Vehicles are usually easier to finance used than specialized machinery. Ask the lender for their asset age limits before shopping.

If I get a line of credit, am I required to use it?

No. Once approved, you decide when and how much to draw. Some lenders charge an annual fee regardless of use (typically $100–$500), so ask about that upfront. If you draw nothing, you still might owe the annual fee, but you won't pay interest.

What happens to my monthly payment if I pay off an equipment loan early?

Most equipment loans have no prepayment penalty, so you can pay it off early without extra charges. You'll save on interest. A few lenders (especially MCAs disguised as loans) do charge prepayment penalties, so always ask before signing.

Can I use a line of credit to buy equipment?

Technically yes, but it's not the best strategy. Lines of credit carry higher interest rates, and if you draw $75K for an excavator, you're paying high interest on a large balance year after year. Equipment loans are designed for this and cost less long-term. Use a line of credit for equipment only if you're buying small tools under $5K or if you absolutely need the flexibility.

ShopFunders is a business-funding marketplace, not a lender. Products and terms vary by qualification.