Understanding Equipment Lines of Credit

An equipment line of credit can be used in two ways. One is borrowing to purchase equipment that generates enough return to repay the loan with interest. The other is using the equipment as collateral, where the lender can seize it if payments are missed. This option is common for businesses with weaker credit or revenue that need collateral to qualify.

What Is a Line of Credit?

A line of credit works like a credit card but on a larger scale. It comes with a set spending limit, and funds become available again as you pay down the balance. Depending on the lender, lines of credit can be secured with collateral or unsecured, with the latter often carrying higher rates due to added risk.

Credit Line vs Loan

Loans provide a lump sum repaid in fixed installments, while credit lines offer flexibility. With a credit line, you only pay interest on what you use and can borrow repeatedly within your limit. This makes them useful for businesses with unpredictable cash flow, unlike loans that suit specific, one-time projects.

Term Options

Equipment lines of credit can range from short to long terms. Short-term credit is common for businesses with lower credit and comes with higher rates. Medium-term credit is for more stable companies with lower costs and higher amounts. Bank credit lines offer the best terms but are only available to top-performing businesses.

Types of Credit Lines

Different forms of credit lines include standard unsecured accounts, equipment-based lines backed by machinery, invoice-backed credit using receivables, and inventory credit tied to stock purchases. Business credit cards are another option but usually have lower limits compared to lines of credit.

Secured vs Unsecured

Equipment credit lines are usually secured by the asset itself. While this poses a risk of losing equipment if payments aren’t met, it often means lower rates and higher limits compared to unsecured options.

Leasing & Soft Costs

These credit lines can also apply to equipment leases, which can provide tax benefits under Section 179. Funds can cover not only the equipment itself but also related expenses such as installation, shipping, training, and software.

Key Advantages

The main benefits include flexible cash flow, quick access to essential equipment, credit terms of one to five years, and the ability to scale limits as your business grows. This financing option allows companies to invest in critical tools while keeping working capital available for other needs.