Business Loans Using Equipment as Collateral

Running a business often means balancing the need to grow, with the pressure of cash flow. Whether it’s upgrading machinery, adding vehicles to your fleet, or investing in new technology, the upfront costs can be daunting.

However, machinery and other business equipment can be used as loan collateral, making it a lifeline for businesses where other forms of security such as your home or a director’s guarantee may not be an option. not Alternatives to Equipment-Secured Lending.

To make the most of this type of lending, you’ll need to understand how it works, what lenders look for, and the advantages and drawbacks before deciding if it’s the right option for you - all of which will be explained in our guide today!

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What Is Equipment-Backed Lending?

Equipment-backed lending is a type of secured business finance where a company uses machinery, tools, technology, or other equipment it owns as collateral for a loan. By pledging these assets, the business provides the lender with security: if the borrower fails to meet repayments, the lender has the legal right to recover and sell the equipment to recoup the outstanding debt. This arrangement reduces the lender’s risk compared to unsecured borrowing, which is why equipment-backed loans often come with lower interest rates and higher borrowing limits.

This form of borrowing is a sub-category of asset-based lending, but it focuses specifically on equipment rather than broader assets such as receivables, stock, or property. Common examples of equipment used as collateral include manufacturing machinery, agricultural tools, IT hardware, or medical devices. 

Vehicles are not usually classed as equipment, although you should check this with your lender first. 

Common industries that often use this form of finance include:

• Manufacturers looking to fund production machinery
• Haulage firms needing new lorries or vans
• Construction companies investing in heavy plant machinery
• Medical practices upgrading diagnostic or surgical tools
• Petrol station operators purchasing fuel storage tanks

These sectors often choose equipment-backed loans because the assets themselves hold substantial resale value, making them suitable security for lenders whilst enabling businesses to quickly access essential funding.

How Does Equipment-Backed Financing Work?

Equipment-backed financing typically works as follows but please keep in mind that each lender’s process may vary:

Valuation of Equipment

The first step is determining the market value of the equipment you plan to use as collateral. Lenders may request professional valuations, recent purchase invoices, or condition reports to establish the equipment’s resale potential. Factors such as age, condition, and demand in the secondary market will influence this value.

Loan-to-Value Ratio

Once the value is set, the lender calculates how much they’re willing to lend against it. This is known as the loan-to-value (LTV) ratio. For example, if your equipment is worth £50,000 and the lender offers a 70% LTV, you could borrow up to £35,000.

Loan Terms

At this stage, the lender outlines the terms of the loan - including the interest rate, repayment schedule, fees, and duration. These terms will reflect both the value of the equipment and the borrower’s overall creditworthiness.

Receiving Funds

Once terms are agreed and contracts signed, the funds are released to your business. This can sometimes happen faster than with unsecured loans, since the collateral reduces the lender’s risk and instead places more risk on the borrower.

Monitoring & Appraisals (If Required)

In some cases, lenders may require periodic checks on the equipment to ensure it remains in good condition and retains sufficient value. This is more common with high-value machinery or long-term loans.

Loan Repayment & Release

As you make repayments, the outstanding balance decreases. Once the loan is fully repaid, the lender releases their claim over the equipment, and ownership is returned to the borrower. If you default, however, the lender has the right to repossess and sell the equipment to recover the debt.

What Are the Pros & Cons of Equipment-Backed Lending?

To understand whether this type of financing is right for you, it’s important to know its advantages and weaknesses:

Pros - Why Businesses Choose Equipment-Backed Finance

• Lower Interest Rates Than Unsecured Loans: Because the lender can recover value from the asset if you default, the risk is lower, which usually translates into cheaper borrowing costs.
• Access to Larger Funding Amounts: High-value equipment can support bigger loans than many unsecured facilities, helping businesses finance costly machinery or fleets.
• Quicker Approval & Funding: With a clear, marketable asset as security, specialist lenders can often underwrite and release funds faster than for unsecured credit.
• Preserves Other Borrowing Capacity: Using specific equipment as collateral can leave other borrowing lines (or corporate property) freed up, so you retain flexibility for future finance needs

Cons - The Risks & Limitations to Consider

• Repossession Risk: If you miss payments, the lender has the right to repossess and sell the equipment, which can interrupt operations.
• Valuation Issues: Lenders rely on resale value; disagreements over condition, age, or market demand can reduce the amount available.
• Potentially Higher Effective Cost if Fees Are Charged: Upfront arrangement fees, valuations, monitoring costs, or exit fees can push the true cost above the headline rate.
• Rapid Depreciation Limits Options: Assets that lose value quickly, like certain IT equipment, may only support short-term loans or lower LTVs, restricting borrowing flexibility.

How Do Lenders Value Business Equipment for Use as Collateral?

Before a lender can offer a loan amount, they need to understand what the equipment is actually worth; this value determines how much security it provides if repayments go wrong. Below are the key valuation factors lenders examine, and why each matters to your loan offer: 

Valuation Criteria (Age, Condition, Market Demand, Residual Value)

Lenders start by estimating the current market value of the asset because that determines how much security it provides. They often require an independent valuation (or will use their own appraiser), and may accept recent purchase invoices for newer items. Key factors they check:

• Age & Hours: Older equipment models or high-hour plant equipment usually reduces the valuation.
• Condition & Service History: Well-maintained, recently serviced equipment scores higher. Photographs, maintenance logs, and invoices help prove this.
• Market Demand: Equipment with a healthy secondary market (e.g. common excavators) is better security than highly specialised kit.
• Residual/Salvage Value: The lender estimates what the asset might fetch at sale after repossession and disposal costs; that residual figure supports the loan offer.

Loan-To-Value (LTV) Expectations

LTV is the percentage of the equipment’s value that a lender is willing to advance. It balances the lender’s recovery potential with the risk of resale loss. 

• How It Works: LTV × equipment value = maximum loan (before other credit checks).
• Typical Ranges: Specialist lenders might lend 50-80% of market value, depending on asset type and condition; fast-depreciating or hard-to-sell items sit at the lower end.

For example, if equipment is valued at £50,000 and the lender offers 70% LTV, the maximum loan against that asset would be £50,000 × 0.70 = £35,000.

Useful Life & Depreciation Schedules

Lenders ask how long the equipment will remain economically useful because this affects both value and loan term:

• Useful Life: The expected period the asset will reliably generate revenue (e.g. a CNC router machine might have a 7-10 year useful life).
• Depreciation Schedule: How the value falls over that life. Lenders commonly use straight-line or accelerated figures depending on the asset class.
• Why It Matters: If the loan term exceeds the asset’s economic life, the collateral may be worth little by the time the debt is repaid. Lenders, therefore, either shorten loan terms or lower the LTV for fast-depreciating items.

With a purchase cost of £50,000, expected salvage of £5,000, and useful life of 7 years, the straight-line annual depreciation would be (£50,000 − $5,000) ÷ 7 = £6,428.57 per year. Lenders use similar math (often with conservative assumptions) to gauge how value will change over the loan.

Borrower Creditworthiness, Business Cash Flow, & Purpose of Funds

Collateral is important, but it’s only part of the story! Lenders will also assess the borrower’s overall ability to repay, involving the following:

• Credit Score & History: Past payment behaviour influences pricing and whether the lender will advance funds at all. For help, check out our article on how to check and improve your credit score.
• Business Cash Flow: Lenders look for consistent cash generation and may calculate metrics such as cash flow coverage to ensure repayments are affordable. A strong, predictable cash flow can improve terms or allow higher LTVs. 
• Trading History & Accounts: For newer businesses, lenders may rely more heavily on the asset; established firms are judged on balance sheets and Profit & Loss statements. 
• Purpose of Funds: Lenders prefer funds tied to productive use (buying income-generating equipment) over funding riskier working capital. The clearer the link between the financial asset and revenue generation, the more comfortable a lender is likely to be. 

To maximise your chances of succes, we recommend reading our top tips guide for successfully securing finance.

What Are the Alternatives to Equipment-Secured Lending?

There are other alternatives to equipment-backed funding that may be more suited to your needs - please contact our team to discuss your needs, and we’ll provide you with expert advice about what to do next:

Unsecured Business Loans

This is a loan where no specific asset is pledged as collateral, with approval relying on the business’s credit profile, cash flow, and trading history. It keeps your assets free, useful for when you don’t want equipment tied up as security or when it has a low resale value. However, unsecured business loans usually have higher interest rates than secured loans. 

When it’s a good option: 

• You need short-term working capital and don’t want to risk repossession of vital goods.
• You’re buying low-value or fast-depreciating equipment where asset security is weak.
• Your business has a strong credit profile and prefers the simplicity of an unsecured facility. 

Invoice Financing

Invoice financing (or asset factoring) provides a way to unlock cash tied up in unpaid customer invoices - the lender advances a large portion of an invoice’s value and charges fees or interest until your customer pays. This financing improves cash flow quickly without using physical assets as collateral, and it is growth-friendly because it scales with sales. However, costs depend on the advance rate and fees. 

When it’s a good option:

• You have substantial outstanding invoices and need immediate working capital to cover payroll, buy stock, or take on a big order.
• You’re growing quickly and want a finance line that increases with sales.

Vendor Financing

Through vendor financing, the equipment supplier (or a finance partner they work with) provides a payment plan or lease so you can acquire goods and pay over time. It is often the fastest route to acquire new equipment; suppliers may offer competitive deals or flexible terms. However, these deals can vary widely - always check the total cost, maintenance obligations, and what happens on default. Some lenders may lock you into supplier servicing or higher end-of-term costs.

When it’s a good option:

• You’re buying new equipment from a supplier who offers attractive finance terms (e.g. 0% for a period or bundled service plans).
• You want a single package (equipment + finance + maintenance) for convenience and predictable budgeting.
• For specialist machinery where the vendor knows the secondary market and can structure a finance deal that high-street lenders won’t.

FAQs

Can I use second-hand equipment as collateral?

Yes, lenders commonly accept second-hand equipment, but the amount they’ll lend depends on its resale value and current condition. To improve your chances, keep maintenance records, get an independent valuation before applying, and match the loan term to the asset’s remaining useful life.

Can I refinance equipment which has outstanding finance?

Yes, although this depends on the type of finance already on the asset and the position of the existing lender. 

If the equipment is subject to a hire purchase or finance lease, the original lender may still hold title or have a charge over the asset, so you’ll usually need to settle that agreement (or get the lender’s consent to a transfer) before a new lender will accept the equipment as collateral.

What happens if I default?

If you default on an equipment-backed loan, the lender can repossess the secured equipment and sell it to recover the debt. If the sale doesn’t cover the outstanding balance, you (and any personal guarantors) remain liable for the shortfall, and you may also face legal costs and damage to your business credit score.

Repossession can disrupt operations and, in extreme cases, contribute to insolvency. If you’re struggling, contact your finance broker or lender directly straight away to discuss repayment options, refinancing, or a sale-and-leaseback.

Who is eligible for equipment-backed financing?

Eligibility can vary between lenders, but most will look for a combination of:

• Business Status: You’ll usually need to be a UK business (sole trader, partnership, or limited company).
• Equipment Type: The asset must hold sufficient resale value and have an established secondary market.
• Ownership & Purchase Structure: If you already own the asset outright, you can often use it as security (sometimes called sale-and-leaseback). If you’re buying new equipment, the lender may take security over the equipment from the outset.
• Creditworthiness & Financial Health: Lenders will review your credit history, accounts, and cash flow to ensure you can afford repayments. Strong trading records improve terms; weaker credit may still be accepted, but with lower LTVs or higher rates.
• Insurance & Maintenance: Many lenders require the asset to be fully insured and properly maintained to protect its value during the loan term.

How can I improve my chances of securing favourable terms?

Here are some top tips to improve your chances of more favourable equipment-backed loan terms:

• Improve your business credit score. 
• Get an independent valuation before you apply
• Keep thorough maintenance records and photos to support condition claims
• Match the loan term to the asset’s useful life
• Present clear cash-flow forecasts showing how repayments will be met
• Shop with a specialist equipment broker who understands your industry, such as Union Business Finance

How long does approval take for an equipment-backed loan?

Approval times vary by lender and the complexity of the deal. Specialist lenders can often give an initial decision within 24-48 hours if valuations and documents are ready, with funds released in as little as a few days. 

More complex cases - such as high-value assets, refinancing, or when independent valuations are required - can take several weeks. To speed things up, prepare financial statements, equipment details, and maintenance records in advance.

What is the interest rate for an equipment loan?

Interest rates on equipment loans vary depending on the lender, Bank of England base rate at the time, the value and condition of the equipment, the loan term, and your business’s credit profile. Rates are often lower than unsecured loans because the asset reduces lender risk, but exact percentages differ widely. 

Always compare the annual percentage rate (APR) or total cost of credit, including fees, to get a true picture of affordability.

Contact Our Brokers to Discuss Your Financing Needs

At Union Business Finance, we have access to a panel of over 100 lenders, and we’re committed to helping your business find the perfect funding solution. Our friendly team is here to help your business grow. We take pride in providing a personalised approach, taking time to understand the core needs of your business, and ultimately helping you secure the funding you need.

It all starts with a simple phone call; get in touch with our friendly brokers today, and we’ll assess your needs to help you reach the next level.

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