For most businesses weighing a line of credit vs. a term loan for an equipment purchase, the term loan fits better, because a machine earns its cost back over years and the debt should be repaid over a similar stretch. A line of credit works when the amount is small enough to clear within months, or as a short bridge until longer financing closes. We ran one $120,000 purchase through both, using rules and rates checked on October 6, 2026.
Should you use a line of credit or a term loan for an equipment purchase?
Start with how long the equipment will be in use and how quickly its earnings can repay the debt. In the Loans section of the FDIC's Risk Management Manual of Examination Policies (March 2026 pages, read October 6, 2026), short-term working capital and seasonal loans "are repaid at the end of the cycle by converting inventory and accounts receivable into cash." Term business loans "normally are granted for the purpose of acquiring capital assets, such as plant and equipment," are usually secured and generally require regular amortization.
On our reading, a business line of credit fits the first kind, and a term loan, including an equipment loan secured by the machine, is the second. A lathe doesn't turn back into cash in 60 days the way a receivable does, so a line balance used to buy one tends to stay put.
A workable test: if normal cash flow can't repay the draw within about 12 months without squeezing payroll or inventory, use a term loan sized to the equipment's working life. That's our rule of thumb, and each lender sets its own limits. See lines of credit vs. term loans for the general comparison.
One $120,000 machine, paid for three ways
Take a machine shop buying a $120,000 CNC mill it expects to run for ten years or more. It has a $150,000 revolving line with nothing drawn, and it borrows up to $70,000 on that line when a large job ties up cash in materials and receivables.
Every figure below is an illustrative assumption. The line is priced at prime plus 2.00%, or 9.00% with the bank prime rate at 7.00% on October 5, 2026 (Federal Reserve H.15), with interest-only payments. The equipment loan is fixed at the same 9.00% for 60 months, with 10% down and level payments. Using one rate isolates structure, and fees are left out.
| Line draw, interest only | Line draw, repaid in 12 months | Equipment loan, 60 months | |
|---|---|---|---|
| Amount borrowed | $120,000 | $120,000 | $108,000 after $12,000 down |
| Monthly payment | $900 | $10,900 falling to $10,075 | $2,242 |
| Balance after 12 months | $120,000 | $0 | $90,090 |
| Total interest | $10,800 a year until principal is repaid | $5,850 | $26,514 |
| Line available after purchase | $30,000 | $30,000 | $150,000 |
The interest-only draw has the lowest payment because none of it reduces the balance. A year later the shop still owes $120,000, and when the next large job needs $70,000, only $30,000 is available. Repaying the draw in 12 months costs the least interest but takes $10,000 of principal a month out of cash flow. Three months in, the line has $60,000 of room, still $10,000 short of that job.
The equipment loan costs the most interest because the money is out for five years. In exchange, the payment is $2,242, the rate is fixed and the full $150,000 line stays free for working capital. The line's rate floats, and each one-point rise in prime adds $100 a month on a $120,000 balance. A self-imposed five-year payoff on the line would run $2,491 a month, with about $100,100 still drawn a year later.
The equipment as collateral, and where your line's lien fits
With equipment financing, the lender's security is usually the machine, and it typically files a UCC-1 financing statement naming that equipment. A line of credit is either unsecured or secured by business assets, often under a blanket lien.
Blanket liens usually reach assets you buy later. UCC 9-204 lets a security agreement cover after-acquired collateral, so a mill bought with a line draw may simply become more collateral for the line. A lender that funds the purchase gets an exception under UCC 9-324(a): a perfected purchase-money security interest in goods other than inventory or livestock has priority over a conflicting security interest in the same goods if it is perfected when the debtor receives possession or within 20 days thereafter. UCC 9-103 ties purchase-money status to an obligation incurred as all or part of the price of the collateral, or for value given to enable the debtor to acquire rights in or the use of the collateral, if the value is in fact so used.
Read your line agreement before signing an equipment loan, because covenants can restrict new debt or new liens. If you plan to pay with the line first and refinance later, ask the equipment lender how it will get its lien position. A loan made after you already own the machine may not qualify as purchase-money, and the lender may want your line lender to subordinate. State versions of the UCC control, so have a lawyer review anything that turns on lien priority.
Down payments and the Section 179 deduction
Equipment lenders often ask for money down, and the amount depends on the lender, your credit and the equipment. Some finance the full price, as our guide to no-money-down equipment financing explains. A line draw needs none, though the principal still has to come from somewhere.
On the Section 179 deduction, neither choice has an edge. IRS Publication 946 (2025 edition, read October 6, 2026) says the Section 179 election lets you deduct all or part of the cost of qualifying property in the year you place it in service, and that the property must be acquired by purchase. Its example of a van paid for over five years treats the buyer as the owner who can depreciate it. For tax years beginning in 2026, the maximum deduction is $2,560,000, reduced by the amount by which the cost of Section 179 property placed in service during the year exceeds $4,090,000 (Rev. Proc. 2025-32). It's also limited to taxable income from the active conduct of a trade or business.
Property is placed in service when it's ready and available for its use, and the IRS's example is a machine delivered one year but installed and operational the next, which counts in the later year. If a December delivery is at stake, the faster funding source may decide which year the deduction lands in. Our Section 179 guide goes deeper, and your accountant should confirm how the rules apply to you.
When a short line of credit draw makes sense
A draw is the right tool for equipment in three situations:
- Small purchases you can repay in months. A $15,000 attachment drawn at the assumed 9.00% and repaid in four equal monthly principal payments costs about $281 in interest.
- A bridge to a term loan that's already approved. If a seller needs payment before the equipment loan can close, 45 days of interest on $120,000 at 9.00% runs about $1,330. Get the term lender's commitment in writing first, and settle the lien question above.
- Short-lived items. Tooling you'll replace within a year or two doesn't need a five-year loan.
In each case the draw has a repayment date before it's made. Keep it small relative to the line as well, and see our guide on how big a line of credit should be for sizing.
How SBA term loans and SBA lines of credit treat equipment
SBA equipment financing follows the same split between a term loan and a line of credit. For 7(a) term loans, 13 CFR 120.212 sets maturity at ten years or less unless the loan finances real estate or equipment with a useful life exceeding ten years. SOP 50 10 8.1, effective October 1, 2026, adds that equipment loans should generally not exceed 10 years, or up to 15 if the IRS asset class useful life supports it. The 504 program finances long-term machinery and equipment with a useful remaining life of at least 10 years.
SBA's CAPLine program is built for working capital. SBA's types of 7(a) loans page describes CAPLines as helping small businesses meet short-term and cyclical working-capital needs. The SOP is direct about equipment on a line: if Working Capital CAPLine proceeds are used to acquire fixed assets, the lender must refinance that portion into an appropriate term facility no later than 90 days after discovering it. Contract CAPLine proceeds may not be used to acquire fixed assets.
Equipment loan vs. line of credit: differences, pros and cons
A business equipment loan and a line of credit differ on purpose, repayment, collateral and liquidity, and each has one main pro and con.
| Equipment or term loan | Line of credit draw | |
|---|---|---|
| Built for | One purchase with a long working life | Short-term, repeating cash needs |
| Repayment | Fixed schedule that pays the balance to zero | Flexible, often interest only |
| Rate | Fixed or variable, set at closing | Often variable |
| Collateral | Usually the equipment | Unsecured, or a lien on business assets |
| Line availability | Unchanged | Reduced by the draw |
| Main pro | Payment matched to the asset, working capital protected | Speed, and interest only on what you use |
| Main con | More paperwork, possible down payment | Easy to leave unpaid, exposed to rate changes and renewal |
Whichever way you lean, get both structures priced by more than one lender. EQ Funding isn't a lender. One application goes to lenders who compete for the deal, and each one assesses your credit and repayment ability and sets its own approval and terms. Compare payment, total interest, fees, down payment, prepayment terms and collateral.