What Is Equipment Finance? The Short Answer
Equipment finance is lending secured by the asset it funds. A business acquires a machine, truck, or device, and the lender holds a first position lien on that specific asset, identified by serial number. If the business fails to pay, the lender repossesses and sells the asset. The collateral is not a promise. It is iron.
Two arrangements cover the market. A term loan where the business owns the asset and the lender holds the lien. And a lease where the lender owns the asset and the business pays for the right to use it.
Why Banks Left Small Ticket Equipment
The same economics that pushed banks out of merchant cash advances and factoring pushed them out of small ticket equipment. A 75,000 dollar machine requires the same title work, lien search, and asset tracking as a 7 million dollar fleet. The revenue is a fraction. The work is not. Banks kept the large fleet deals and left the single asset deals to nonbank lenders.
How a Lender Underwrites the Asset
Equipment underwriting asks two questions. Can the borrower pay, and what is the asset worth if it must be sold. Lenders size exposure against orderly liquidation value, not replacement cost or book value. Advance rates typically land between 70 and 85 percent of that value for strong asset classes.
The asset class matters more than the price tag. A standard skid steer from a major manufacturer has a deep resale market. A custom built packaging line has almost none. Lenders price the depth of the secondary market, because that market is the exit.
Term must fit useful life. A lender will not write a 7 year term against an asset that wears out in 4.
Lease Types That Change the Risk
Lease type decides who carries residual risk. In a finance lease, the business effectively buys the asset over time, and the lender's exposure behaves like a loan. In a true lease, the lender takes back the asset at term end and must remarket it. The lender now carries the residual value risk, the bet that the asset will be worth what was assumed.
That residual bet is why true lease underwriting includes a view of the future secondary market, not just today's value.
Where Equipment Finance Sits Inside Specialty Finance
Equipment finance is the hard asset side of specialty finance. Where a merchant cash advance underwrites future receipts and factoring underwrites existing invoices, equipment finance underwrites tangible value with a serial number and a resale market. Duration is longer, tied to useful life, and the exit runs through remarketing rather than collection.
Wrapping Up the Series
Read together, the four parts of this series cover the specialty finance market. Part 1 defined the umbrella: nonbank capital underwriting what banks stopped pricing. Part 2 covered future receipts. Part 3 covered existing invoices. Part 4 covers hard assets. The common thread is the same in every segment: underwrite the asset or the cash flow itself, keep the ticket small, keep the duration honest, and let live data do the monitoring.
The Bottom Line
So what is equipment finance? It is lending secured by the asset it funds, sized against orderly liquidation value, and priced on the depth of the resale market. The details that matter are the ones on the file: the serial number, the lien position, the advance rate, and the lease type.
Disclaimer. This post is for informational purposes only and is not financial or legal advice. Consult a professional before making financial decisions.