Equipment Loan vs. Working Capital Loan: Which to Choose

Business owners often face a simple—but important—financing question:

“Do I need an equipment loan, or would a working capital loan be better?”

While both provide access to funding, they serve very different purposes and have different structures, timelines, and repayment expectations.

Choosing the right option sets your business up for healthy repayment, maximized tax efficiency, and the right debt-to-asset match.

This guide explains:

• The core differences between equipment loans and working capital loans
• When to use each type
• Typical rates, terms, and approvals
• Real-world examples to make the decision clear

What Is an Equipment Loan?

An equipment loan is a business loan used exclusively to purchase a specific tangible asset—such as:

• Trucks, trailers, or fleet vehicles
• Manufacturing or CNC machinery
• Restaurant or medical devices
• Office systems or computers

The loan is typically secured by the equipment itself, which acts as collateral.

Key Features:

• Loan term: 2–7 years
• Interest rate: 6%–14% (fixed or variable)
• Down payment: Often 0%–10%
• Approval timeline: 24–72 hours
• Tax benefit: Eligible for Capital Cost Allowance (CCA) and interest deductions

Explore: Financing & Leasing Options

What Is a Working Capital Loan?

A working capital loan provides short-term funding for general business expenses like:

• Payroll
• Inventory
• Marketing
• Rent
• Repairs or vendor payments

These loans are not tied to a specific asset and are often unsecured—which may mean slightly higher rates.

Key Features:

• Loan term: 6–24 months
• Interest rate: 10%–29% (depending on credit and revenue)
• Approval timeline: 1–3 days
• Use of funds: Flexible
• Tax benefit: Interest is deductible

Explore: Working Capital & Line of Credit Options

Quick Comparison Table

When to Choose an Equipment Loan

✅ You’re purchasing a physical asset worth more than $10,000
✅ You want a fixed monthly payment to match long-term use
✅ You plan to use the equipment for 2+ years
✅ You want tax deductions for depreciation and interest
✅ You prefer lower interest rates and longer terms

Explore: Understanding the Basics of Truck Loans

When to Choose a Working Capital Loan

✅ You’re facing a temporary cash crunch
✅ You need to cover payroll, rent, or supplier invoices
✅ You want to restock inventory or handle seasonal dips
✅ You don’t have a specific asset to secure the loan
✅ You need maximum speed and flexibility

Explore: Business Line of Credit in Canada

Real Case Study: Choosing the Right Loan

Business: Alberta-based construction subcontractor
Scenario 1: Needs to purchase a $45K used mini-excavator for a 3-year contract
Scenario 2: Needs $20K to pay fuel bills and workers during a 60-day delay in receivables

What They Did:

• Used an equipment loan for the excavator with a 48-month fixed term
• Applied for a working capital loan with a 6-month term to bridge cash flow
• Kept payments separate, with asset-based amortization vs. short-term cash coverage

Result: They secured equipment, covered bills, and aligned repayment to real needs—not a one-size-fits-all loan.

FAQs: Choosing Between Working Capital and Equipment Loans

Can I use a working capital loan to buy equipment?
You can—but it’s not ideal. Rates are higher, and you won’t be able to claim depreciation (CCA). You may also pay more over time due to shorter repayment terms.

Can I combine both types of funding?
Absolutely. Many businesses finance equipment with a term loan while using a credit line or working capital loan for install, insurance, or seasonal cash needs.

Is a line of credit better than a working capital loan?
A line of credit gives flexibility for multiple small expenses, while a loan is better for one-time, larger cash needs.

Final Word: Right Loan, Right Purpose

The best loan is the one that matches:

• Your business objective
• Your timeline and repayment ability
• The specific asset or need you’re funding

At Mehmi, we’ll help you avoid mismatches—like using short-term loans for long-term assets or over-leveraging for cash flow. Our credit analysts structure solutions that support your growth without stress.

Not sure whether to finance equipment or borrow for working capital?
Speak to a credit analyst or use our calculator to explore options tailored to your exact business scenario.

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