The downsides of buying equipment on a line of credit

What is wrong with buying equipment on a line of credit?

Nothing, at the moment of purchase. It is fast, the money is already approved, and there is no new application. That is exactly why it happens so often.

The problems show up later, and they show up in a predictable order: first the rate moves, then the renewal comes up, then you need the line for something urgent and it is already spent, and then a year after that a better financing option turns out to be complicated by a lien you agreed to and forgot about. Each of the five sections below is one of those.

Downside 1: the rate is variable and the asset is not

Most business lines of credit are priced as prime plus a margin and float for the life of the balance. Prime sits at 6.75% as of September 2026, and bank business lines commonly land around 8% to 8.5% APR. Online and fintech lines run considerably wider, from single digits to well over 30% depending on the lender and structure.

Compare that to an equipment finance agreement, which is fixed for the full term. The payment you sign is the payment you make in year five.

The asymmetry is what matters. If you finance a $150,000 machine on a fixed-rate agreement, a rate cycle does nothing to you. If you carry that balance on a variable line and prime moves two points, your carrying cost rises by roughly $3,000 a year on the outstanding balance, and it keeps rising for as long as the balance is there. You took an interest rate position you did not intend to take, on an asset that produces the same revenue either way.

Downside 2: the line renews annually, the equipment does not

This is the risk owners underestimate most. A line of credit is generally a one-year facility that gets reviewed and renewed. It is not a commitment to lend you that money for five years.

Three things can happen at review that a term loan is immune to:

• The limit gets cut. A softer year, a covenant miss, or a change in the bank's appetite for your industry, and a $250,000 line becomes a $150,000 line. If you are drawn to $180,000 on equipment, you now have a problem that has nothing to do with your business performance.
• The line is not renewed. The balance becomes due or gets termed out on the bank's terms rather than yours.
• An annual clean-up provision bites. Many bank lines require the balance to reach zero for a stretch each year, often thirty consecutive days. That covenant exists specifically to prevent the line from being used as long-term financing. Equipment on a line is the exact behavior it was written to catch, and a clean-up you cannot perform is a default.

Some lines also carry a demand feature, meaning the lender can call the balance without a default. Read for that before you fund a five-year asset with it.

Downside 3: the blanket lien on everything you own

This one costs the most and shows up the latest.

Bank lines of credit are typically secured by a blanket UCC-1 filing covering all business assets: equipment, receivables, inventory, and general intangibles, including assets you have not bought yet. An equipment finance agreement, by contrast, takes a lien on the single machine it financed and nothing else.

The consequence surfaces the next time you want to finance something. An equipment lender needs a first-position security interest in its collateral. If your bank already has a blanket filing, the new lender has to ask your bank for a subordination or a release on that specific asset. Banks grant those, but not always, not quickly, and not without a conversation you may not want to have while a deal is time-sensitive. Deals get repriced or lost over exactly this.

Downside 4: you just spent your emergency capacity on a machine

A line of credit exists to absorb timing problems: a customer paying at 75 days instead of 30, a payroll cycle that lands badly, a repair nobody planned for, an opportunity that needs cash in a week.

Converting that capacity into a fixed asset does not eliminate the timing problems, it just removes the tool you had for handling them. And it does so in the least reversible way possible, because you cannot un-buy the machine when the receivable goes late.

The right comparison is not "line of credit rate vs. equipment financing rate." It is "what is the flexibility worth?" A business that finances the machine on term debt and keeps a $200,000 line untouched is in a structurally stronger position than one that owns the machine outright with no liquidity left, even if the second one paid slightly less interest.

Downside 5: no amortization, so the balance never goes away

Term debt amortizes. Every payment retires principal on a schedule, and on a defined date the debt is gone.

Revolving debt does not. Minimum payments on many lines are interest-only, so a business can carry an equipment purchase on a line for years, pay real money every month, and still owe the original balance. Over time that hardens into what bankers call a permanent working capital deficit: a revolving balance that never revolves, which is one of the first things a credit analyst looks for when reviewing your file.

It also affects how the debt reads to the next lender. A term loan with 28 payments remaining is a known, declining obligation. A perpetually drawn line is an open-ended one.

Does the tax treatment favor one or the other?

No, and this is a common misconception worth clearing up. Section 179 and bonus depreciation follow ownership of the equipment, not the source of the funds. If you buy and place a machine in service, you can generally expense it whether you paid cash, drew on a line, or signed an equipment finance agreement.

Interest is deductible either way as well. So the tax question does not decide this. Structure, rate stability, lien position, and liquidity decide it.

Tax treatment depends on your situation and current law. Confirm the specifics with your CPA before relying on any deduction.

Line of credit vs. equipment finance agreement

Illustrative comparison. Terms vary by lender and profile; some lines are fixed-rate and some equipment structures are variable.

When is a line of credit the right call for equipment?

There are real cases, and pretending otherwise would be dishonest:

• Small-ticket purchases. Under roughly $10,000 to $15,000, documentation and origination costs can outweigh the rate advantage of a term structure. Draw it, pay it back over a few months, move on.
• Emergency replacement. A failed machine on a Friday with a Monday production commitment. Use the line, then refinance it into term debt once the crisis passes.
• Soft costs equipment lenders will not fund. Freight, rigging, installation, electrical work, permits, training, and the working capital to run the thing before it earns. Equipment lenders fund hard assets; the line is built for the rest.
• Bridging a purchase window. Auction and private-party deals sometimes need money faster than an appraisal can be ordered. Bridge with the line, then term it out.
• Deals no equipment lender will touch. Very old assets, unusual collateral, or private-party purchases with a thin paper trail. Sometimes the line is the only instrument available, and knowing that going in is different from stumbling into it.

The common thread in every one of those: the line is a temporary position, not the permanent home for the debt.

You already bought equipment on your line. Now what?

This is a fixable situation, and it is one of the more common reasons businesses call us.

An equipment sale-leaseback or equipment refinance converts equipment you already own into term debt. The lender advances against the machine's value, you use the proceeds to pay down the line, and you end up with a fixed payment on a defined schedule and your line of credit restored to full availability. The equipment does not move and operations do not change.

It works best when the equipment is recent, identifiable by serial number, and free of other liens. Purchases made within the last twelve months are usually the cleanest, since the invoice and payment record are easy to produce.

The bottom line

The rule is older than any of us and it still holds: match the term of the financing to the life of the asset. Short money for short needs, long money for long assets. A line of credit funding a seven-year machine breaks that rule in four places at once, and the bill arrives later, usually at the least convenient moment.

Keep the line for what it is good at. Finance the equipment on the equipment.

Frequently asked questions

Can I use a business line of credit to buy equipment?

Yes, and it is common because the money is already approved. The drawbacks are that the rate is usually variable, the facility is typically reviewed and renewed annually, it is often secured by a blanket lien on all business assets, and drawing it converts your liquidity cushion into a fixed asset you cannot easily unwind.

Is it cheaper to use a line of credit or an equipment loan?

The headline rate on a bank line is often lower, around 8% to 8.5% today with prime at 6.75%, but it is variable and unsecured comparisons are misleading. An equipment finance agreement is fixed for the full term, amortizes to zero, and takes a lien only on the machine. Over a five-year hold, rate stability and lien position usually matter more than the starting rate.

Does a business line of credit put a lien on my equipment?

Usually yes. Bank lines are typically secured by a blanket UCC-1 filing covering all business assets, including equipment you have not purchased yet. An equipment finance agreement takes a lien only on the specific machine it funded, leaving your other assets unencumbered.

Will using my line of credit hurt my chances of getting equipment financing later?

It can. An equipment lender generally needs a first-position security interest in its collateral, and a blanket lien from your bank sits ahead of it. That requires a subordination or partial release from the bank, which adds time, is not guaranteed, and can reprice or kill a time-sensitive transaction.

Can I refinance equipment I already bought on my line of credit?

Yes. An equipment sale-leaseback or equipment refinance advances against machinery you already own, so you can pay down the line and replace revolving debt with a fixed, amortizing payment. It works best on equipment purchased within the last twelve months that is identifiable by serial number and free of other liens.

Do I still get Section 179 if I buy equipment with a line of credit?

Generally yes. Section 179 and bonus depreciation follow ownership and the date the equipment is placed in service, not the source of the funds. Because the tax treatment is the same either way, it should not be the factor that decides between a line of credit and an equipment finance agreement. Confirm the specifics with your CPA.

What is an annual clean-up requirement on a line of credit?

It is a covenant requiring the outstanding balance to reach zero for a defined period each year, commonly thirty consecutive days. It exists specifically to stop borrowers from using a revolving line as long-term financing. Carrying an equipment purchase on the line is the behavior the covenant was written to catch, and failing the clean-up is a default even if every payment has been made on time.

This article is general information about commercial financing and is not tax, legal, or investment advice, nor a commitment to finance. Rates cited reflect published averages as of September 2026 and change over time. All financing is subject to credit approval and underwriting.