Franchise Equipment Financing and Leasing

Key Takeaways

Franchise equipment financing uses the equipment itself as collateral, which can make approval easier and preserve cash for working capital.
Equipment loans let you own the equipment and typically run terms matched to its useful life, often 3 to 7 years.
Leases can lower upfront cash and simplify upgrades, but they often cost more in total and may leave you without ownership at the end.
Soft costs such as installation, software, and freight are harder to finance than physical equipment, so budget for them separately.
Tax treatment differs between loans and leases, so involve a CPA before choosing a structure.

Franchise equipment financing is a loan or lease that pays for the specific equipment your franchise needs, such as ovens, fitness machines, vehicles, or restoration gear, with the equipment itself serving as collateral. It can preserve your cash for working capital and is often easier to obtain than a general business loan. The tradeoff is cost and, with leases, whether you end up owning anything.

For equipment-heavy concepts, equipment can represent a large share of the total investment shown in Item 7 of the FDD. How you pay for it affects how much cash you have left on opening day. And cash on opening day is what carries you through a slow first quarter.

Terms, rates, and tax rules change. Treat this as a guide to how the options work, then get quotes and confirm details with your lender and CPA.

How does franchise equipment financing work?

An equipment lender pays the vendor for the equipment. You repay over a set term. Because the equipment secures the loan, the lender can repossess it if you default, which lowers the lender’s risk and can make approval easier.

Typical features:

Term. Often 3 to 7 years, usually matched to the equipment’s useful life. Lenders rarely finance equipment beyond the period it’s expected to last.
Down payment. Ranges from none to around 20 percent, depending on credit, equipment type, and lender.
Rate. Depends on your credit, time in business, and how easy the equipment is to resell. Startups typically pay more than established businesses.
Personal guarantee. Almost always required for a new business.

Many franchisors have a required equipment package and approved vendors. Some vendors and franchisor affiliates offer their own financing or leasing. Those programs are disclosed in Item 10 of the FDD if the franchisor or an affiliate provides them. Our guide to franchisor financing covers how to evaluate them.

Equipment loans vs. leases

Feature	Equipment loan	Fair market value lease	$1 buyout lease
Who owns it	You	Lessor	Lessor during term, then you
Upfront cash	Down payment often required	Often first and last payment	Often first payment
Monthly payment	Moderate	Usually lowest	Similar to a loan
End of term	You own it outright	Return, renew, or buy at market value	Buy for a nominal amount
Total cost	Usually lowest	Can be highest if you buy at the end	Similar to or above a loan
Best for	Durable equipment with a long life	Technology that dates quickly	Equipment you want to keep but with lease structure

When a loan makes sense

Loans fit durable equipment you’ll use for years: commercial kitchen equipment, vans and trucks, heavy restoration gear, or cleaning equipment for a commercial cleaning business. You build equity in the asset, and once it’s paid off, your monthly costs drop.

When a lease makes sense

Leases fit equipment that becomes outdated, such as point-of-sale hardware, some fitness technology, or diagnostic tools. They can also fit when preserving cash is the top priority and you’re willing to pay more over time for it.

Read lease terms carefully. Watch for automatic renewal clauses, end-of-term return conditions, and how the buyout price is determined. A fair market value lease can turn expensive if you decide to keep the equipment and the lessor sets a high value.

Should you use an SBA loan or separate equipment financing?

The SBA 7(a) loan program can fund equipment as part of a broader franchise loan, typically with terms up to 10 years for equipment. Bundling everything into one loan means one lender and one payment.

Separating equipment financing can make sense when:

The SBA lender wants a smaller loan or more collateral coverage
The franchisor’s approved vendor offers favorable terms
You want shorter-term debt tied to assets that wear out
You’re adding equipment after opening, when reopening an SBA loan isn’t practical

The two need to work together. An SBA lender typically wants a first-position lien on business assets. If an equipment lender also takes a lien on specific equipment, your lenders and attorney need to sort out who holds what before closing.

A hypothetical example: protecting working capital

Consider a hypothetical buyer, Sarah, opening a boutique fitness studio with a total project cost of $380,000, including $120,000 of equipment. She has $110,000 in liquid capital.

Scenario A: Pay cash for equipment. She spends $120,000 on equipment and finances the build-out separately. Her cash reserve is gone before the first member walks in.

Scenario B: Finance the equipment. She finances the $120,000 over five years with a 10 percent down payment of $12,000. Assuming a 9 percent rate purely for illustration, her payment would be roughly $2,240 a month. She now has a monthly obligation, but she keeps far more of her cash available for the presale period, payroll, and local marketing during the ramp-up.

Neither scenario is free. Scenario B costs more in total because of interest. Running out of cash in month six can cost far more, which is why franchisors and lenders press so hard on liquid capital requirements before they approve anyone.

What’s hard to finance

Equipment lenders like assets they can repossess and resell. They’re less enthusiastic about:

Installation and freight. Some lenders roll these in, many cap them.
Software and licenses. Intangible and hard to repossess.
Custom build-out. Leasehold improvements are attached to the building, so equipment lenders usually won’t fund them. That’s typically SBA or bank territory.
Used equipment. Financeable, but often with shorter terms and higher rates.

Budget for these soft costs separately so they don’t surprise you.

Tax considerations

Owning equipment usually lets you depreciate it, and tax rules sometimes allow businesses to deduct a large portion of qualifying equipment costs in the year it’s placed in service. Lease payments are often deductible as an operating expense instead. Which is better depends on your profitability, entity type, and current tax law, which changes. Ask your CPA before choosing a structure, and before year-end if you’re timing a purchase.

Questions to ask any equipment lender or lessor

What is the total cost over the full term, including fees and any buyout?
Is the rate fixed?
What down payment or upfront payments are required?
Is there a prepayment penalty?
What happens at the end of the term?
Do you take a lien only on this equipment, or a blanket lien on all business assets?
Will you finance installation, freight, and software?

How equipment financing fits the bigger picture

Equipment financing is one layer of a broader plan. Most buyers combine it with personal funds, an SBA loan, or other sources. Our guide on how to finance a franchise compares every option. If you’re bringing in a co-owner to share costs, read our guide to franchise partnership structures first.

If you’re coming to ownership later in a career, our guides to a franchise second career and leaving corporate to buy a franchise cover how to balance debt with your timeline and retirement goals. SCORE also offers free mentors who can review your equipment and financing plan.

Your next step

How much equipment you need depends heavily on the industry. A residential cleaning business and a coffee shop are worlds apart in equipment cost. Take the free Franchise Genie assessment to see which industry categories fit your budget, involvement, and risk appetite. Then price the equipment, compare loan and lease quotes, and keep enough cash in reserve to sleep at night.

Frequently Asked Questions

What is the difference between an equipment loan and an equipment lease?

With an equipment loan, you borrow money to buy the equipment, you own it from day one, and the lender holds a lien until you repay. With a lease, the lessor owns the equipment and you pay to use it for a set term, with options to return it, renew, or buy it at the end. Loans usually cost less in total, while leases can lower upfront cash and simplify upgrades.

Can I finance franchise equipment with an SBA loan?

Yes. SBA 7(a) loans can fund equipment along with build-out, the franchise fee, and working capital, typically with terms up to 10 years or tied to the equipment's useful life. Some buyers use a separate equipment loan or lease instead to keep the SBA loan smaller or to match financing to specific assets. Your lender can help you decide which structure makes sense for your project.

What credit score do I need for equipment financing?

Requirements vary by lender. Because the equipment serves as collateral, equipment lenders are often somewhat more flexible than lenders making general business loans, but stronger credit still earns better terms. Buyers with weaker credit may face higher rates, larger down payments, or shorter terms. Startups without business history usually rely on personal credit and a personal guarantee.

Is it better to lease or buy franchise equipment?

Buying usually makes more sense for durable equipment you'll use for many years, such as commercial ovens or vehicles. Leasing can make sense for technology that becomes outdated quickly or when preserving cash is the top priority. Compare the total cost of every lease payment plus any buyout against the total cost of a loan, and ask your CPA how each affects your taxes.