Benefits of Equipment Financing for Canadian Businesses

Buying new equipment can help a business increase capacity, replace outdated machinery or take on work that would otherwise be out of reach. The challenge is that equipment can also require a significant upfront investment.

Equipment financing gives businesses another option. Instead of paying the entire purchase price in cash, a business can finance eligible equipment and repay the cost over time.

What Is Equipment Financing?

Equipment financing is a form of business financing used to purchase equipment, machinery, vehicles or other assets needed to operate or grow a business.

Depending on the financing arrangement, the equipment being purchased may also serve as security for the loan.

Equipment financing can be used for a wide range of business assets, including:

• Construction equipment
• Manufacturing machinery
• Commercial vehicles
• Restaurant equipment
• Medical or dental equipment
• Computers and technology
• Agricultural or industrial equipment
• Tools and specialized machinery

The exact equipment that qualifies depends on the lender and financing program.

Equipment Loan vs. Lease: What Changes?

Equipment financing can involve a purchase loan or a lease. With a loan, your business buys the asset and repays the lender; the equipment may secure the debt. With a lease, you pay to use equipment owned by the lessor. Whether you can buy it at the end, and at what price, depends on the agreement.

Compare the down payment, all scheduled payments, any final buyout, maintenance responsibilities and the ability to replace or modify the equipment. A low lease payment alone does not show the total cost of obtaining ownership. BDC’s guide to buying or leasing business equipment explains why useful life, cash flow and lease conditions matter.

What Are the Benefits of Equipment Financing?

The right financing arrangement can allow a business to invest in equipment while keeping more cash available for other expenses.

Preserve Your Business Cash Flow

Paying cash for a major piece of equipment can create a large one-time expense.

Financing allows you to spread that cost over a longer period rather than taking the entire amount out of your operating cash at once.

That can leave more money available for expenses such as payroll, inventory, marketing, rent and unexpected repairs.

Cash flow can be particularly important for businesses with seasonal revenue or companies going through a period of growth.

Get the Equipment You Need Sooner

Waiting until you have enough cash to purchase equipment outright may delay expansion or prevent you from accepting certain projects.

Equipment financing can allow a business to acquire an asset when it is needed rather than waiting months or years to save the full purchase price.

If a new machine, vehicle or piece of equipment allows the business to produce more, serve more customers or operate more efficiently, getting that equipment sooner may have a direct impact on revenue.

Spread the Cost Over the Useful Life of the Equipment

Equipment is usually purchased because it will be used for several years.

Financing can spread the cost of that equipment over time rather than requiring the business to pay the full amount before it has had an opportunity to generate revenue from the asset.

The important part is choosing a financing term that makes sense for the expected useful life of the equipment.

You generally don’t want to still be paying for equipment long after it needs to be replaced.

Keep Existing Credit Available

Using all of your available cash or drawing heavily on an operating line of credit to purchase equipment may leave less flexibility when another business expense comes up.

Dedicated equipment financing can allow businesses to keep other sources of credit available for short-term or unexpected operating expenses.

This can be particularly useful when a business regularly needs working capital for materials, inventory or payroll.

Finance Expensive Equipment Without a Large Upfront Purchase

Some equipment costs tens or even hundreds of thousands of dollars.

Even profitable businesses may not want to remove that much cash from the company at once.

Equipment financing makes larger purchases more manageable by breaking the cost into scheduled payments.

The federal Canada Small Business Financing Program also allows eligible Canadian small businesses to use term financing for certain new or used equipment, including commercial vehicles, production equipment and computer or telecommunications equipment. Eligibility and lending decisions remain with participating financial institutions.

Equipment Financing vs. Paying Cash

Paying cash eliminates borrowing costs, so it may make sense when a business has substantial excess cash and the purchase will not affect its ability to cover other expenses.

Financing may be more attractive when maintaining liquidity is important.

Considering a personal vehicle instead? See our comparison of financing a car versus paying cash for a vehicle-focused look at the same cash-flow tradeoff.

For example, consider a business buying a $75,000 piece of equipment.

Paying cash means the business immediately reduces its available cash by $75,000.

Financing means the business will pay interest, but it retains more capital to operate the company while making scheduled payments.

The better option depends on factors such as:

• Available cash
• Financing rates and fees
• Monthly payment requirements
• Expected revenue generated by the equipment
• How long the equipment will remain useful
• Other upcoming business expenses

Looking only at the monthly payment can make financing appear cheaper than it really is. Compare the full borrowing cost over the entire financing term.

What Should You Consider Before Financing Equipment?

Before signing an equipment financing agreement, make sure you understand exactly what you are agreeing to.

Look at:

Interest Rate

A lower rate can significantly reduce the total cost of financing, particularly on larger purchases or longer loan terms.

Loan Term

Longer terms generally reduce the monthly payment but can increase the total amount of interest paid.

Down Payment

Some lenders may require the business to contribute a portion of the equipment cost upfront.

Fees

Ask about application fees, documentation fees, administration charges and any other costs associated with the financing.

Early Repayment

Find out whether the financing can be paid off early and whether prepayment charges apply.

Security

Understand whether the equipment itself or other business assets will be used as security.

Can Equipment Financing Help a Business Grow?

It can.

The value of equipment financing isn’t simply that it allows a company to borrow money. It can give the business access to a productive asset sooner while retaining cash for other priorities.

The key question is whether the equipment is likely to provide enough value to justify its cost.

If a $100,000 machine allows a company to take on significantly more work, reduce labour costs or replace unreliable equipment, financing it may make sense even if the company technically has enough cash to buy it outright.

Equipment financing should ultimately support the business rather than place unnecessary pressure on its cash flow.

Is Equipment Financing Right for Your Business?

Equipment financing can be worth considering when your business needs equipment but you would prefer to spread the purchase cost over time.

Before choosing a financing option, compare the interest rate, term, fees, security requirements and total amount you will repay.

The lowest monthly payment isn’t necessarily the least expensive option. Understanding the full cost of the financing can help you decide whether the equipment — and the financing used to purchase it — makes sense for your business.