Fund Your Franchise’s Tools and Machinery

Every franchise business relies on equipment – whether it’s ovens and freezers for a restaurant, fitness machines for a gym, or computers and vehicles for a service franchise. Equipment financing is a loan or lease specifically designed to help you purchase these necessary tools without paying the full cost upfront. From the perspective of Liberty Franchise Lending, equipment financing is one of the most straightforward ways for franchisees to acquire expensive equipment while preserving cash flow. In this section, we’ll discuss who should consider equipment loans, typical amounts, rates, terms, key approval factors, pros, cons, and answer common questions.

Equipment financing is ideal for franchise owners who need to purchase or upgrade equipment, machinery, or vehicles essential to their business. If you’re launching a new franchise location, you likely have a list of required equipment (often specified by the franchisor). Existing franchisees may also use equipment loans when replacing outdated equipment or expanding services. This type of financing is suited for those who don’t want to tie up a huge amount of cash in equipment purchases. For example, rather than spending $100,000 all at once on kitchen appliances, a restaurant franchisee can finance that amount and pay over several years. Even if you have the cash on hand, financing can be smart to maintain a cushion for operating expenses. Equipment loans are commonly used by franchisees in restaurants, hospitality, auto repair, fitness, healthcare, and any franchise requiring substantial gear. If the equipment will generate revenue or improve efficiency, using equipment financing to acquire it can be a good move.

The amount you can get through equipment financing usually corresponds to the price of the equipment itself. Lenders often finance 80% to 100% of the equipment cost (sometimes even a bit more to cover soft costs like installation or delivery). Loan sizes can range from as low as around $5,000 or $10,000 for small equipment purchases up to several hundred thousand dollars. In fact, some banks advertise equipment financing up to $2 million or more for qualified borrowers. For most single-unit franchise needs, equipment loans might fall in the $20,000–$500,000 range. The exact amount will depend on what you’re buying – e.g., a delivery van might be $30k, whereas a suite of commercial kitchen equipment could be $150k. It’s important to get a quote or invoice from the equipment supplier; lenders will base the loan on the actual cost of the item(s). One advantage here is that the equipment itself typically serves as collateral for the loan, which often allows lenders to approve larger amounts as long as the equipment is valuable.

Interest rates for equipment financing can vary widely. They generally reflect the fact that the loan is secured by the equipment (which lowers risk) but also consider the creditworthiness of the borrower and the useful life of the equipment. As of now, many equipment loans carry rates roughly in the 7% to 20% range. If you have strong credit and your franchise is well-established, you might qualify for the lower end (high single digits). For example, some borrowers can find equipment loan APRs around 6–8% with bank lenders or specialized equipment finance companies. On the other hand, if your credit is fair or the equipment is specialized (resale value low), the rate could end up in the mid to high teens. Lease financing often quotes a factor rate instead of an interest rate, but when converted to APR it might fall in a similar range (or sometimes higher for small ticket leases). The good news is that because equipment financing is secured, the rates are usually lower than unsecured working capital loans. Additionally, competition among lenders (banks, leasing companies, even the equipment manufacturers who sometimes offer financing) can help keep rates competitive. It’s wise to shop around or use a broker like Liberty Franchise Lending to compare offers and find a favorable rate.

Equipment loans typically have moderate-term lengths, often aligned with the expected useful life of the equipment. Common repayment terms range from about 2 to 7 years . For smaller equipment or rapidly depreciating items (like tech gadgets or POS systems), you might see shorter terms (2–3 years). For heavy machinery or expensive vehicles that last a long time, terms of 5, 6, or even 7 years are possible. Some lenders also offer flexibility like seasonal payment plans if your franchise business is seasonal. The idea is to ensure the loan is paid off before or around the time the equipment might need replacement. By the end of the term, you ideally own the equipment free and clear (in the case of a loan) or can upgrade/renew if it was a lease. There usually are no prepayment penalties with equipment loans, so if you want to pay it off early you can often do so (check your specific lender’s terms). Keep in mind that a longer term will lower your monthly payment, but you’ll pay more in interest over the life of the loan, whereas a shorter term means higher monthly costs but less total interest. It’s about finding the right balance for your franchise’s cash flow.

Several factors influence how much equipment financing you can get and the terms you’ll receive:

• Equipment Value and Type: The very nature of the equipment is critical. Lenders will ask: What are you buying? Is it new or used? High-tech or standard? Equipment that holds value (or has a ready resale market) is easier to finance. For example, commercial vehicles or standard ovens are straightforward – lenders know their resale value. Highly specialized equipment might be harder to resell, which can limit how much a lender will finance (or they might charge a higher rate to compensate for the risk).
• Credit Score and Business History: Your personal credit score will be a major factor, especially if your franchise is new. A higher credit score can get you approved for a larger amount and at a better interest rate. Lenders also consider your business’s financial health – if you’re an existing franchise, they’ll look at revenue and profit to ensure you can make loan payments. Startups will rely more on personal credit and projected income.
• Time in Business: Some equipment financing companies have a minimum time-in-business requirement (often 1–2 years) for easier approval. However, there are options for startups too, especially when the franchise system is strong. In startup cases, you might need to provide more documentation or a personal guarantee.
• Down Payment: Equipment loans can often be done with zero down payment (100% financing), but in some cases lenders might ask for a down payment of 10–20%, especially if the borrower’s credit is marginal or the equipment is used. Putting some money down can improve your approval odds and perhaps lower the interest a bit, because it means the lender is financing less of the purchase.
• Collateral and Guarantees: The great thing about equipment financing is the equipment itself usually serves as collateral – typically through a lien or a title (if it’s a vehicle). Generally, you won’t need to pledge additional collateral beyond the equipment, unless the equipment’s value isn’t enough. Lenders will usually advance a percentage of the equipment’s invoice price (80–100%). They might also require a personal guarantee from the franchise owner, meaning you agree to repay from personal assets if the business cannot. This is standard for small business loans.
• Franchisor or Supplier Involvement: Some franchise systems have preferred equipment vendors or even in-house financing programs. If the franchisor offers an equipment financing deal, that could affect what you choose. Also, some equipment manufacturers or suppliers provide financing promotions (like “0% interest for 12 months” offers). These can be worth considering and can also influence a lender’s willingness – e.g., if you have a vendor quote, a lender sees it’s a legit purchase.
• Cash Flow from the Business: Particularly for existing franchises taking an equipment loan, lenders will look at your debt service coverage – basically, do you have enough earnings to comfortably handle the new loan payment on top of existing obligations? A strong cash flow or proven profitability will support a larger loan amount approval.

Understanding these factors can help you present a stronger application. For instance, if your credit is a bit low, offering a down payment or additional collateral might persuade a lender to approve the financing.

Financing your franchise equipment offers several benefits:

• Preserves Working Capital: Instead of spending a large sum to buy equipment outright, an equipment loan lets you spread the cost over time. This keeps more of your cash free for day-to-day expenses, emergencies, or opportunities. Maintaining healthy cash flow is crucial, especially in a new franchise.
• Equipment Itself is Collateral: Unlike general loans, equipment financing usually doesn’t require you to put your home or other assets on the line. The equipment secures the loan . If you default, the lender can repossess that equipment, but your other assets are safer (aside from personal guarantee obligations). This focused collateral can make it easier to obtain financing.
• Fast and Accessible: Equipment loans and leases can often be approved relatively quickly – sometimes in just a few days to a couple of weeks. Lenders have streamlined processes for equipment purchases, especially for standard items. Many offer “application-only” approvals for loans up to a certain amount (for example, no extensive financials needed for equipment costs under $150k or $250k). This means less paperwork than an SBA loan, and faster turnaround to get your franchise up and running.
• Flexible Structures (Loan or Lease): There are various ways to finance equipment. You can take a term loan and own the equipment at the end, or you could opt for an equipment lease (which might have lower monthly payments or allow easy upgrades). Some leases even have options like returning the equipment or buying it for a nominal amount at the end. This flexibility lets you choose what makes sense: own the asset for the long haul, or lease if you expect to upgrade often.
• Potential Tax Benefits: In many cases, the interest you pay on an equipment loan is tax-deductible as a business expense. Additionally, if you purchase equipment, you may be able to take advantage of Section 179 deduction or bonus depreciation, allowing you to write off a large portion of the equipment cost in the first year (consult with a tax advisor on current limits). If you lease, the lease payments are generally fully deductible as an operating expense. Either way, financing can provide some tax advantages for your franchise.
• Keeps Your Franchise Up-to-Date: By using financing, you can afford the latest or higher-quality equipment that might have been too expensive to buy with cash. This can give you a competitive edge – for example, newer kitchen equipment might be more energy-efficient (saving utility costs) or better at delivering a quality product, which can boost customer satisfaction. Essentially, equipment financing enables you to invest in the best tools for your business’s success without delay.

Before jumping into equipment financing, consider a few potential downsides:

• Interest and Cost: Financing means you will pay interest, which makes the equipment cost more over time than paying cash upfront. For example, a $50,000 piece of equipment financed over 5 years at a moderate interest rate might end up costing perhaps $55,000–$60,000 in total with interest. If you have cash and it won’t hurt your business by using it, you could save money on interest by buying outright. Always weigh the financing cost against the benefit of keeping your cash.
• Debt Obligation: An equipment loan adds a fixed monthly expense that you must pay regardless of how your franchise is performing. If business slows down, you still owe the payments. Taking on too much debt can strain your business, so franchisees should be cautious not to over-leverage. It’s generally wise to ensure the revenue generated by the equipment (or cost savings it provides) comfortably exceeds the loan payment.
• Depreciation and Obsolescence: Some equipment loses value quickly or can become obsolete as technology advances. You might find yourself still paying off a loan for equipment that’s no longer cutting-edge or has high maintenance costs in later years. This is where thinking about term length is important – don’t finance something longer than its useful life. In fast-tech franchises (say, a tech-focused service), leasing might be preferable so you can upgrade when needed.
• Down Payment or Additional Costs: While many equipment financings are zero down, if your situation requires a down payment, that’s an upfront cost to budget for. There might also be other costs like loan origination fees or UCC filing fees. These are usually small relative to the loan, but worth noting. Additionally, you’ll need to insure the equipment (lenders will require it), adding to your ongoing costs.
• Collateral Risk: If you default on an equipment loan, the lender will repossess the equipment. This could cripple your franchise operations if you suddenly lose a vital piece of machinery. While this is an obvious consequence, it’s a risk to keep in mind – you are tying that equipment to the debt. Also, if the equipment’s value doesn’t fully cover the remaining loan balance, you may still owe the difference after repossession.
• Complexity of Some Leases: If you choose equipment leasing, be aware of the fine print. Some leases can have complicated terms: for instance, end-of-lease conditions (like you must return equipment in a certain condition or be charged), or automatic renewals. You’ll want to understand if it’s a fair market value lease, $1 buyout, etc. Leasing can be very useful, but the accounting and terms are different from a straightforward loan.

In summary, ensure that the benefits of having the equipment on financing outweigh the costs and risks. For most franchisees, if the equipment is crucial and will help drive revenue, financing is justified – just go in informed.