Equipment Financing Glossary
Get Equipment Financing — Not Just Definitions
Axiant Partners makes equipment financing simple. Tell us what equipment you need and we match you with the right lender — no jargon required. Rates from 5% APR, 0% down for qualified borrowers.
- ✓ All equipment types and brands
- ✓ Rates from 5% APR
- ✓ 0% down for 680+ FICO
- ✓ New and established businesses
- ✓ Decision in 24–48 hours
Get a Free Quote in 60 Seconds
Equipment Financing Glossary — 40+ Terms Defined
Plain-English definitions for every term you'll encounter in equipment loan agreements, lease documents, and lender conversations — organized alphabetically.
How to Use This Glossary
- Terms are organized alphabetically with plain-English definitions
- Related terms are cross-linked throughout the glossary
- For deeper explanations, links point to dedicated guide pages
- Each term includes practical context for equipment financing specifically
A
Advance Rate
The percentage of an asset's value that a lender will finance. An 80% advance rate on a $100,000 piece of equipment means the lender provides $80,000, requiring a $20,000 down payment. Also expressed as Loan-to-Value (LTV). Strong-credit borrowers financing new major-brand equipment often access 90–100% advance rates (0% down). Used or specialty equipment typically supports only 70–85% advance rates. See also: Down Payment, Loan-to-Value.
Amortization
The process of paying off a loan through regular scheduled payments that cover both principal and interest. A fully amortizing loan has payments calculated so that the final payment reduces the balance to exactly zero. Equipment loans are typically fully amortizing over 36–84 months. The amortization schedule shows how much of each payment goes to interest vs. principal — early payments are interest-heavy; later payments are principal-heavy.
APR (Annual Percentage Rate)
The annualized cost of borrowing, expressed as a percentage. APR includes both the stated interest rate and certain fees (origination fees, prepaid interest), making it the best "apples-to-apples" comparison metric. For equipment loans, APR accounts for the amortizing structure — each payment reduces the principal, so the effective cost of borrowing changes over time. Compare: Factor Rate (used by some fintech lenders; does not account for time value of money). Always ask lenders to quote APR, not just "rate." See our Equipment Financing Rates 2026 guide for current APR ranges.
B
Balloon Payment
A large lump sum due at the end of a loan term. Balloon payment structures (common in lease structures and some equipment loans) result in lower monthly payments because the loan is only partially amortizing. At maturity, you pay the balloon — typically 10–30% of original loan amount — as cash, refinance, or (in a lease) equipment return. Balloon payment loans are useful for businesses that expect high cash flow at a future date or plan to sell the equipment before maturity. Risk: if you can't pay or refinance the balloon, you may lose the equipment.
Blanket Lien
A UCC-1 filing that grants the lender a security interest in all of a borrower's business assets — not just the specific equipment being financed. Blanket liens are common in fleet financing and working capital loans. A blanket lien can complicate future financing from other lenders, who may be reluctant to lend against assets already encumbered. If you're asked to sign a blanket lien agreement for an equipment loan, understand its implications for future borrowing. See: Fleet Equipment Financing.
C
Capital Lease (Finance Lease)
A lease structured so that the lessee essentially assumes all the risks and benefits of ownership. Under ASC 842 (current US GAAP), a capital/finance lease appears on the balance sheet as both an asset and a liability. Economically similar to a loan. A lease is classified as a finance lease if it meets any of five criteria: ownership transfers at end of term, bargain purchase option exists, lease term is 75%+ of economic life, PV of payments is 90%+ of fair value, or it's a specialized asset. Compare: Operating Lease (off-balance-sheet for qualified leases).
Collateral
The asset pledged as security for a loan. If the borrower defaults, the lender may repossess and sell the collateral to recover the outstanding balance. In equipment financing, the equipment itself is the primary collateral (specific lien). In some loans, additional collateral may include other business assets (blanket lien), personal real estate, or other equipment. Collateral quality — brand recognition, age, market depth, ease of repossession — directly affects loan terms, rates, and approval odds.
Covenant
A contractual obligation in a loan agreement requiring the borrower to maintain certain conditions throughout the loan term. Financial covenants may require maintaining minimum DSCR (e.g., 1.25x), maximum debt-to-equity ratio, or minimum cash balance. Operational covenants may require maintaining insurance, keeping equipment in good repair, or notifying the lender of ownership changes. Covenant violations can trigger default even if you're current on payments. Review all covenants before signing large equipment loan agreements.
D
Depreciation
The accounting process of allocating the cost of an asset over its useful life. For tax purposes, equipment depreciation provides annual deductions that reduce taxable income. Methods include MACRS (standard for US tax purposes), straight-line, and double declining balance. The Section 179 deduction and bonus depreciation allow businesses to accelerate depreciation dramatically — deducting most or all of the cost in year one. See: Equipment Financing Tax Benefits and Section 179 Equipment Deduction.
Down Payment
The upfront cash amount paid at loan origination, reducing the financed amount. A 20% down payment on a $100,000 equipment loan means $20,000 cash paid at closing and $80,000 financed. Down payment requirements depend on credit score, time in business, and equipment type. Strong borrowers (680+ FICO, 2+ years in business) can often obtain 0% down on new major-brand equipment. Startups typically face 15–25% down. Higher down payments reduce total interest and monthly payments. See: No Money Down Equipment Financing.
DSCR (Debt Service Coverage Ratio)
A measure of a business's ability to service debt from operating income. Calculated as: Net Operating Income ÷ Total Annual Debt Service. A 1.25x DSCR means the business generates 25% more income than its debt payments — the minimum most lenders require. DSCR of 1.5x+ qualifies for best terms. Below 1.0x DSCR means negative cash flow relative to debt — a red flag that typically results in loan decline or requires additional collateral. DSCR is typically calculated from the most recent 2 years of tax returns or financial statements.
E
EFA (Equipment Finance Agreement)
A type of financing document that functions like a loan — the borrower owns the equipment, makes fixed payments, and the lender holds a lien until payoff. Different from a lease in that ownership is explicit from the start. EFAs are common for equipment purchases where the borrower wants ownership benefits (depreciation deduction, no use restrictions) without the complexity of a traditional loan structure. EFAs are commonly used by smaller equipment lenders and fintech platforms for transactions under $150,000.
Equipment Lease
A financing arrangement where a lessee pays a lessor for the right to use equipment for a defined period. The lessor retains ownership (in an operating lease) or the lessee gains ownership benefits (in a finance lease). Equipment leases offer lower monthly payments than loans (because the lessor retains residual value risk), flexibility to upgrade equipment, and possible off-balance-sheet treatment. Trade-offs: higher total cost in most cases, restrictions on use and modification, and no equity buildup. See: Equipment Financing vs Lease.
Equipment Loan
A term loan secured by the equipment being purchased. The borrower receives funds (or the lender pays the seller directly), makes fixed monthly payments over 36–84 months, and owns the equipment at payoff. The lender holds a lien (UCC-1) on the equipment until the loan is fully repaid. Equipment loans are the most common financing structure for construction, agricultural, and industrial equipment. Benefits over leases: ownership, full depreciation deduction, no use restrictions, residual value accrues to borrower. See: How Commercial Equipment Financing Works.
F
Factor Rate
A multiplier used by some fintech and online lenders to calculate total repayment cost. A 1.25 factor rate on a $100,000 loan means total repayment is $125,000, regardless of term. Unlike APR, factor rates do not decrease with early repayment — you owe the full $125,000 whether you pay in 6 months or 18 months. A 1.25 factor rate on a 12-month loan is equivalent to approximately 50% APR. A 1.10 factor rate on a 6-month loan is approximately 40% APR. Always convert factor rates to APR before comparing quotes. Traditional equipment lenders use APR; factor rates appear primarily in merchant cash advances and some small-ticket equipment leasing.
Fair Market Value (FMV)
The price at which equipment would change hands between a willing buyer and a willing seller, both reasonably informed, in an arm's-length transaction. FMV is used in FMV leases (where the lessee can purchase at FMV at end of term), equipment valuation for loan collateral, and tax purposes. Sources for equipment FMV: NADA Commercial Guides, IronPlanet Marketplace Value, Ritchie Bros. auction comps, and Equipment Watch. Lenders base their advance rate and loan amount on FMV, not necessarily the purchase price.
Finance Charge
The total dollar amount of interest and fees paid over the life of a loan. For a $100,000 equipment loan at 8% over 60 months, the finance charge is approximately $21,659. Finance charge = (monthly payment × number of payments) − loan principal. Understanding the total finance charge helps compare financing options. The Truth in Lending Act (TILA) requires disclosure of total finance charges for certain consumer loans, though most commercial equipment loans are exempt from TILA disclosure requirements.
Fintech Lender
A technology-driven financial services company offering equipment financing, often with faster approval processes, lower documentation requirements, and higher rates than traditional lenders. Examples: Clicklease, Currency (Lendio), Balboa Capital, Crest Capital (partially fintech). Fintech lenders dominate the small-ticket market ($5,000–$75,000) for startups and businesses with less-than-perfect credit. Trade-off: speed and accessibility come at higher rates (often 15–30% APR or expressed as factor rates). Best used when traditional lenders decline or when the financing need is small and fast. See: Equipment Financing for Startups.
Fleet Financing
Financing structures designed for businesses purchasing 3 or more pieces of equipment. Includes Master Equipment Finance Agreements (MEFAs), blanket lien programs, and fleet-specific pricing. Fleet financing simplifies administration (one agreement, fewer applications) and often provides rate discounts of 0.25–0.75% for 5+ units. Common in trucking, construction, agriculture, landscaping, and rental industries. See: Fleet Equipment Financing.
I
Interest Rate
The annual percentage charged on the outstanding loan balance. The stated interest rate is used to calculate monthly payments but may not reflect total borrowing cost (APR does). Equipment loan interest rates in 2026 range from 5% (excellent credit, new major-brand equipment) to 28%+ (bad credit, startup, specialty equipment). Interest on equipment loans is deductible as a business expense. See: Equipment Financing Rates 2026.
M
MACRS (Modified Accelerated Cost Recovery System)
The standard depreciation method for US business assets for federal tax purposes. MACRS provides accelerated depreciation — larger deductions in early years, smaller in later years. Equipment is classified into 5-year, 7-year, 10-year, or longer recovery periods based on IRS asset class. Most business equipment falls into the 7-year class (14.29% first-year depreciation). MACRS is the base depreciation method; Section 179 and bonus depreciation are accelerations on top of MACRS. See: Equipment Financing Tax Benefits.
Master Lease Agreement / Master Equipment Finance Agreement (MEFA)
A pre-negotiated credit facility allowing a business to add equipment throughout the year without a new full application each time. The lender pre-approves the business up to a credit limit; each equipment addition requires only a schedule addendum. MEFAs are standard for fleet financing and companies that acquire equipment incrementally. The master agreement sets credit limits, terms, rate structures, and collateral provisions that govern all subsequent equipment additions. See: Fleet Equipment Financing.
N
Net Present Value (NPV)
The difference between the present value of cash inflows and the present value of cash outflows over a period of time. For equipment financing decisions, NPV analysis compares the cost of financing (interest, fees) against the revenue or savings the equipment generates. A positive NPV means the equipment investment generates more value than it costs. Used by CFOs and financial analysts to evaluate buy vs. lease vs. rent decisions. Most small equipment purchases don't require formal NPV analysis — simple payback period calculations are sufficient for decisions under $250,000.
O
OEM Financing (Captive Finance)
Financing offered by the original equipment manufacturer through a captive finance subsidiary. Examples: Caterpillar Financial Products, John Deere Financial, CNH Industrial Capital, Bobcat Financial Services. OEM lenders typically offer competitive rates, periodic 0% promotional programs, and streamlined processes through the dealer network. They finance only new equipment from their own brands (or used equipment meeting age requirements) purchased through authorized dealers. OEM captive lenders are often the best source for 0% down + 0% interest promotional financing. See: No Money Down Equipment Financing.
Origination Fee
An upfront fee charged by the lender for processing and underwriting the loan, typically expressed as a percentage of the loan amount (0.5–3%) or a flat dollar amount ($250–$1,500). Origination fees reduce the effective loan amount (you receive less than the face value of the loan) or are added to the loan balance. When comparing lenders, add origination fees to calculate the true APR — a low rate with a high origination fee may cost more than a slightly higher rate with no fee. Some lenders advertise "no origination fee" but embed costs in higher rates instead.
P
Personal Guarantee
A legal commitment by an individual (typically the business owner) to personally repay a business loan if the business defaults. Personal guarantees are nearly universal for equipment loans to LLCs and corporations under 2 years old, and common for established businesses as well. When you sign a personal guarantee, the lender can pursue your personal assets (bank accounts, home equity, vehicles) in addition to business assets upon default. Personal guarantees are required from all owners with 20%+ stake in most lender policies. See: Equipment Financing for LLC.
Prepayment Penalty
A fee charged for paying off a loan before the scheduled maturity date. Equipment loans may include prepayment penalties ranging from 1–5% of outstanding balance, or may use a "rule of 78s" calculation that front-loads interest. Some lenders have no prepayment penalty. If you anticipate selling the equipment or refinancing, confirm prepayment terms before signing. SBA loans have prepayment penalties in the first 3 years (7(a)) or 10 years (504). Most conventional equipment loans offer penalty-free prepayment after the first year or no penalty at all.
Prime Rate
The benchmark interest rate that US banks charge their most creditworthy commercial customers. The prime rate is typically 3 percentage points above the federal funds rate set by the Federal Reserve. Many variable-rate equipment loans and SBA 7(a) loans are priced at prime plus a spread (e.g., prime + 2%). When the Fed raises rates, prime increases and variable-rate loan payments increase. In 2026, the prime rate is approximately 7.5%. Fixed-rate equipment loans are not affected by prime rate changes after origination.
R
Residual Value
The estimated value of an asset at the end of a lease term. In a Fair Market Value (FMV) lease, the lessee can purchase the equipment at its residual (FMV) at lease end. In a $1 buyout lease, the residual is $1. In an operating lease, the lessor retains the residual value risk/reward. Higher residual value assumptions result in lower lease payments (the lessee only pays for the "used up" portion of the asset's value). Equipment with strong used markets (Cat, Deere) supports higher residuals and lower lease payments.
S
Sale-Leaseback
A transaction where a business sells equipment it already owns to a lender or leasing company, then leases it back. The business receives immediate cash (sale proceeds) and continues using the equipment under the lease. Sale-leasebacks unlock capital in owned equipment without disrupting operations. Useful when a business needs working capital but doesn't want to take on new debt. The "sale" price is typically 70–85% of fair market value; the lease payments are structured to repay the lender over the lease term. See related entry: Fair Market Value (FMV).
Section 179
An IRS tax code provision allowing businesses to deduct the full purchase price of qualifying equipment in the year it is placed in service, rather than depreciating over its useful life. For 2026, the Section 179 deduction limit is $1,160,000 with a phase-out beginning at $2,890,000 in total qualifying property. Crucially, Section 179 applies to financed equipment — you do not need to pay cash to take the deduction. Cannot create a net operating loss (unlike bonus depreciation). See: Section 179 Equipment Deduction.
Secured Loan
A loan backed by collateral that the lender can seize upon default. All equipment loans are secured loans — the equipment is the collateral. Secured loans offer lower interest rates than unsecured loans because the lender has a recovery mechanism. The security interest is documented via a UCC-1 filing. Compare: unsecured business loans (lines of credit, SBA 7(a) for working capital) which have higher rates but no specific collateral requirement.
Skip Payment
A financing feature allowing the borrower to skip one or more monthly payments without penalty, typically used in seasonal businesses. Common in agricultural equipment financing where income is concentrated in harvest months. A "skip payment" loan on farm equipment might allow payments in 9 months per year with 3 skipped months aligning with low-income periods. Skip payment programs typically result in slightly higher overall interest costs to compensate the lender. Available from some OEM lenders (John Deere Financial for ag) and specialty agricultural lenders.
Soft Costs
Non-equipment costs associated with a project that can be included in the financed amount. In equipment financing, soft costs might include: delivery and freight, installation and setup, training, extended warranties, and sometimes even sales tax. Some lenders allow soft costs up to 20–25% of the hard equipment cost. Including soft costs in the loan simplifies cash flow planning but increases total financed amount and interest paid. Always confirm with your lender what soft costs are eligible for inclusion.
Split Loan
A financing structure that divides one equipment purchase into two separate loans with different terms — often used when a portion of the transaction has different collateral characteristics. Example: financing a $250,000 machine where $200,000 is hard equipment (lower rate, longer term) and $50,000 is soft costs (higher rate, shorter term). Split loans can optimize the cost and structure of complex equipment transactions. More common in large industrial and manufacturing equipment financing than in standard construction or agricultural equipment loans.
Step-Up Lease
A lease (or loan) structure where payments increase over the term — lower payments in early periods, higher payments later. Step-up structures are useful for businesses expecting revenue to grow (new equipment expected to generate increasing revenue over time) or businesses with current cash flow constraints. Compare: step-down leases (payments decrease over time, used when equipment is most valuable and productive early in its life). Both structures result in the same present value of payments as a flat payment structure, just redistributed over time.
Synthetic Lease
A complex financing structure treated as an operating lease for accounting purposes (off-balance-sheet) but as a loan for tax purposes (allowing depreciation deductions). Synthetic leases provide accounting advantages (no balance sheet impact) and tax advantages (depreciation deduction) simultaneously. However, FASB ASC 842 accounting changes have reduced the accounting advantage of synthetic leases significantly. Synthetic leases are primarily used by large corporations for real estate and major equipment, not by small businesses. Consult a CPA and attorney before entering any synthetic lease structure.
T
Term
The length of a loan or lease, expressed in months. Equipment loan terms typically range from 24 months (short-term, high payments, low total interest) to 84 months (long-term, low payments, high total interest). The optimal term depends on: equipment useful life (don't finance beyond expected life), cash flow requirements (lower payments vs. lower total cost), and lender maximums. Used equipment and older equipment typically qualify for shorter maximum terms. See: Equipment Financing Rates 2026 for term/rate relationships.
U
UCC-1 Financing Statement
A legal document filed by a lender with the state secretary of state establishing a security interest (lien) in specific collateral. UCC-1 filings are public record — other lenders and creditors can search for existing liens before extending credit. A UCC-1 filed on specific equipment establishes the lender's priority claim on that equipment in a default or bankruptcy. A UCC-1 with an "all assets" description creates a blanket lien. When you pay off an equipment loan, the lender should file a UCC-3 termination statement to clear the lien — if they don't, follow up or you may have difficulty with future financing.
Unwind Fee
A fee charged for terminating a lease or financing agreement before its natural end date — distinct from a prepayment penalty on a loan. Unwind fees are most common in lease structures and represent the lender's cost of realizing their expected return ahead of schedule. Unwind fees may be calculated as a percentage of remaining payments or as a fixed fee plus present value of future payments. Before signing, always understand the cost to exit early — equipment needs and business circumstances change, and a high unwind fee can create a financial trap.
Used Equipment
Previously owned equipment being financed. Used equipment faces higher interest rates (+1–3% vs. new), lower advance rates (80–90% of appraised value), age limit restrictions by equipment type (construction: 15 years, ag: 10 years, medical: 7 years), and additional documentation requirements (inspection reports, service records, serial number verification). However, used equipment's lower purchase price typically results in lower total cost of acquisition even with the higher rate. See: Used Equipment Financing Guide.
W
Wrap Rate
The all-in interest rate on a loan that "wraps" together the base interest rate and any fees into a single blended rate. A wrap rate is presented as a single interest rate that accounts for all costs, making comparison easier. Some equipment lenders use wrap rates instead of quoting APR separately from fees. A loan with a 7% stated rate and a 2% origination fee has a wrap rate of approximately 8.5–9% depending on term. Ask lenders whether their quoted rate is a simple interest rate or a wrap rate to ensure accurate comparison.
Ready to Apply the Knowledge?
Now that you understand the terms, Axiant Partners makes getting equipment financing simple. Get matched with the right lender in 60 seconds.
Frequently Asked Questions — Equipment Financing Glossary
What is the difference between APR and a factor rate?
APR (Annual Percentage Rate) is the annualized cost of borrowing expressed as a percentage — it accounts for the time value of money on an amortizing loan. A factor rate is a multiplier (e.g., 1.30) used by some fintech and merchant cash advance lenders: multiply the loan amount by the factor to get total repayment, regardless of when you repay it. A 1.30 factor rate on a 12-month $100,000 loan means you repay $130,000 total, equivalent to approximately 60% APR. Always convert factor rates to APR before comparing to traditional lender quotes. Factor rates do not decrease if you repay early, unlike APR-based loans.
What is a UCC-1 filing in equipment financing?
A UCC-1 (Uniform Commercial Code Form 1) is a financing statement filed by a lender with the secretary of state in your state. It establishes and publicly records the lender's security interest (lien) in specific collateral — typically the financed equipment, and sometimes all business assets (a blanket lien). A UCC-1 protects the lender's priority position: if the borrower defaults or goes bankrupt, the UCC-1 establishes the lender's right to the collateral ahead of other creditors. UCC-1 filings are public record. When you pay off an equipment loan, ensure the lender files a UCC-3 termination statement to remove the lien.
What does DSCR mean in equipment financing?
DSCR (Debt Service Coverage Ratio) is a measure of a business's ability to service its debt obligations from operating income. It is calculated as Net Operating Income divided by Total Debt Service (principal + interest payments). A DSCR of 1.0x means your business generates exactly enough income to cover debt payments. Lenders typically require 1.25x or higher for equipment loan approval — meaning you need 25% more income than your debt payments. A DSCR of 1.5x or higher qualifies for the best rates. DSCR below 1.0x (negative cash flow relative to debt service) typically results in loan decline or requires substantial collateral and/or guarantors.
What is a balloon payment in equipment financing?
A balloon payment is a large lump sum payment due at the end of a loan term. In equipment financing, balloon payment structures make monthly payments lower (because the loan is only partially amortizing) but require a large payoff at the end — typically 10–30% of the original loan amount. Example: A $200,000 equipment loan with a $40,000 balloon over 60 months would have lower monthly payments than a fully amortizing loan, but you'd owe $40,000 at month 60 — either as a cash payoff, refinance, or (in a lease structure) equipment return.
What is a sale-leaseback for equipment?
A sale-leaseback is a transaction where a business sells equipment it already owns to a lender or leasing company, then leases it back from that entity. The business receives cash (the sale proceeds) and continues to use the equipment under the lease agreement. Sale-leasebacks are used to unlock capital tied up in equipment without disrupting operations. Example: A construction company owns an excavator worth $150,000 free and clear. They sell it to a leasing company for $130,000, receive cash, and pay $2,500/month to continue using it for 60 months.
What is advance rate in equipment financing?
Advance rate (also called loan-to-value or LTV in equipment financing) is the percentage of the equipment's value that a lender will finance. An 80% advance rate on a $100,000 piece of equipment means the lender will lend $80,000 — requiring a $20,000 down payment. Advance rates vary by equipment type, age, credit quality, and lender. New equipment from major brands (Cat, Deere, Komatsu) typically supports 90–100% advance rates for strong borrowers. Used equipment typically supports 80–90% advance rates. When a lender says "0% down," they are effectively offering a 100% advance rate.