Important Finance Terms
Understanding heavy equipment financing terms is key to making smart business decisions. Our glossary explains the most important equipment loan and leasing terms in easy-to-understand language, so you can move forward with clarity.
Costs & Payments
Down Payment
The upfront amount you pay at the start of a loan or lease. A higher down payment can lower your monthly payments and interest costs.
Residual Value
What the equipment is expected to be worth at the end of your lease. This helps determine your monthly payments and whether buying at the end is a good deal.
Example: A transportation company leases a $200,000 fleet truck for four years, with an estimated residual value of $40,000. They finance the remaining $160,000 and make monthly payments of about $4,058. At the end of the lease, they can buy the truck for $40,000 or return it.
Balloon Payment
A larger lump sum you pay at the end of a loan or lease. This can make your monthly payments more affordable during the term.
Fixed Rate Financing
A loan or lease with a consistent interest rate, so your monthly payments never change.
Financing Structures & Agreements
Equipment Loan
A traditional loan where you borrow money to purchase heavy equipment. You make regular payments (including interest), and once the loan is paid off, you fully own the equipment.
Example: A construction company uses an equipment loan to purchase a $250,000 excavator at a 10% interest rate. Over five years, they make monthly payments of about $5,312, and at the end of the term, they own the excavator outright for continued use.
Equipment Lease
Instead of buying, you rent the equipment for a set period. This often includes options at the end of the lease to return the equipment, extend the lease, or purchase it.
Operating Lease
A short-term lease where you use the equipment without the intention of ownership. This is often used for equipment that becomes outdated quickly or when you only need it for a project or season.
Capital Lease (Finance Lease)
A long-term lease where you take on many of the benefits and risks of ownership, including maintenance. In most cases, you can buy the equipment at the end for a low cost or predetermined price.
Credit & Approval
Pre-Approval
An early check of your credit and financial information so you know what you can afford and your likely financing terms before applying.
Credit Score
A rating that reflects your company’s (or your personal) credit history. A higher score can lead to better financing rates.
Collateral
Assets, usually the equipment itself, that the lender can claim if payments aren’t made. Collateral lowers risk for lenders, which can help you qualify more easily.
Example: A logging company finances a $500,000 feller buncher, using the machine as collateral. Because the lender can repossess the equipment if payments aren’t made, the company secures better interest rates and flexible terms.
Personal Guarantee
A promise by the business owner to personally pay back the financing if the company cannot. This can make approval easier but adds personal responsibility.
Process & Documentation
Application Package
The financial documents (like tax returns, bank statements, and a quote for the equipment) that lenders need to review your application.
Term Sheet
A document that outlines your loan or lease terms—like rates, payment schedule, and fees—before everything is finalized.
Example: A manufacturing company reviews a term sheet for a $100,000 CNC machine loan. The 5-year term at 10% interest results in monthly payments of about $2,125, clearly detailed so there are no surprises later.
UCC Filing
A legal filing that lets the lender claim rights to the financed equipment if you don’t meet your obligations.
Amortization Schedule
A payment breakdown showing how much of each payment goes to the loan balance (principal) versus interest, helping you see progress over time.
Tax & Accounting Benefits
Section 179 Deduction
A U.S. tax rule that lets you deduct the full purchase price of qualifying equipment (up to certain limits) in the year you put it into service, which can significantly reduce your tax bill.
Example: An agricultural operation purchases $150,000 in new tractors. By applying the Section 179 deduction, they can write off the full amount in the same tax year, saving roughly $31,500 in federal taxes (assuming a 21% tax rate), freeing up cash for seed, fuel, and labor.
Bonus Depreciation
An additional tax deduction that allows you to write off a large percentage of equipment costs right away, instead of spreading it out over time.
Fair Market Value (FMV) Lease
A lease where you can return the equipment, extend the lease, or buy it at its fair market value at the end. Often used to keep payments low and equipment current.
Industry-Specific Terms
Seasonal Payment Plans
Payment options designed for industries like farming, logging, or construction, where income is seasonal. Payments may be lower or deferred during slower months.
Usage-Based Financing
A flexible payment plan where your payments depend on how much you use the equipment—helpful for industries like mining, oil & gas, or trucking.
Fleet Financing
Specialized financing for businesses purchasing multiple machines or vehicles at once, common in construction, transportation, and waste management.