Equipment finance encompasses the broad set of products that help businesses acquire productive assets: trucks, machinery, technology, aircraft, medical equipment, construction gear, and virtually any other tangible productive asset. The market is served by bank equipment finance divisions, independent finance companies, captive finance arms of equipment manufacturers, and leasing companies.
The two primary structures are loans and leases. Equipment loans are secured by the equipment itself, with the borrower owning the asset and the lender holding a first-priority security interest. Loans amortize over a term that typically matches the useful economic life of the equipment. Leases are more complex: the lessor (the finance company) retains legal ownership of the equipment and rents it to the lessee for a defined period. At the end of the lease term, the lessee can purchase the equipment, return it, or renew the lease.
The residual value — the estimated fair market value of the equipment at lease end — is the critical variable in equipment leasing. The lessor's return is partly a function of credit income (interest on the lease financing) and partly a function of the realized residual value at disposition. If the lessor overestimates the residual at lease inception, they face losses at end-of-term. Managing residual risk requires expertise in each equipment category's depreciation trajectory, secondary market depth, and technological obsolescence rate.
Equipment finance credit analysis emphasizes the economic life of the collateral, the borrower's ability to service debt from equipment-generated income, and the liquidation value of the asset in a distressed scenario. Hard assets like construction equipment and aircraft often have robust secondary markets; technology equipment depreciates rapidly and carries higher residual risk.
Tax considerations shape equipment finance structures significantly. Operating leases allow lessors to claim depreciation while lessees keep the asset off balance sheet (subject to ASC 842 accounting rules). For borrowers with high taxable income, accelerated depreciation (bonus depreciation) under U.S. tax law makes outright purchase or finance leases particularly attractive.