Equipment Financing and Leasing for Hardware Startups

A hardware company raises a Series A and spends a large share of it on machinery. Twelve months later the equipment is working, the company has revenue, and the founders have given away several percentage points of the business to buy assets that could have been financed at a fraction of the cost.

Equity is the most expensive capital in existence. It should fund the things nobody will lend against — people, research, market development. A machine with an active resale market is precisely the thing lenders will finance, and using equity for it is one of the more expensive habits in capital-intensive companies.

This guide covers the products, how they are underwritten, what qualifies, what the dilution comparison actually looks like, and the terms worth negotiating.

1. Why This Works When Other Debt Does Not

Most lenders assess a startup and decline. No profitability, no history, few assets.

Equipment lenders think differently. They underwrite the asset first and the company second, because if you fail they can repossess and sell the machine. Their downside is not “total loss” but “recovery at auction value”.

That inverts the usual analysis. The questions become:

• Is there an active secondary market for this equipment? The single most important question.
• How quickly does it depreciate?
• Is it easy to remove and transport? Equipment bolted into a building or requiring specialist decommissioning is harder to finance.
• Can you make the payments? Relevant, but secondary to the first three.

2. The Products

Equipment loan

You borrow, buy the equipment, and own it. The lender takes a security interest in the asset. You typically contribute a down payment — commonly 10% to 20% — and repay over a term matched to the equipment's useful life.

Best when you want ownership, the asset holds value, and you will use it beyond the loan term.

Capital or finance lease

Economically similar to a loan. You use the equipment for the term and typically own it at the end, frequently through a nominal purchase option. Treated as ownership for accounting and tax purposes.

Operating lease

You rent. The lessor retains ownership and residual risk. Payments are usually lower because the lessor expects to re-lease or sell the asset afterwards.

Best for equipment that becomes obsolete quickly, or where you genuinely do not want to own it. Computing hardware is the obvious case.

Sale-leaseback

Underused and worth knowing. You sell equipment you already own to a finance company and lease it back, continuing to use it exactly as before.

The effect is to convert owned assets into immediate cash with no dilution. For a company that bought hardware with equity in an earlier round, this releases capital that is currently sitting idle in a machine.

Vendor financing

The manufacturer or its captive finance arm provides the funding. Frequently the fastest and cheapest route, because the vendor wants the sale and knows the resale market better than anyone. Always ask — many companies never do.

Lease line or master facility

A pre-approved facility you draw against as you acquire equipment over time, rather than negotiating each purchase separately. Worth arranging if you expect a series of acquisitions.

3. What Finances Well — and What Does Not

Finances easily:

• Standard manufacturing equipment — CNC machines, injection moulding, packaging lines
• Laboratory instruments with an established resale market
• Vehicles and fleet
• Construction and material handling equipment
• Medical and diagnostic devices
• Servers, networking and computing hardware, including GPUs

Finances poorly or not at all:

• Bespoke one-off equipment built to your specification with no other buyer. This is the most common disappointment for deep tech companies, whose most important machine is frequently the least financeable.
• Software and licences
• Installation, commissioning and freight costs — frequently excluded, so budget to fund these separately
• Leasehold improvements and anything permanently affixed to a building
• Rapidly obsolete equipment with a collapsing secondary market

The compute case

AI companies running their own hardware face a specific version of this decision. GPUs are expensive, depreciate on an uncertain curve, and have an active but volatile secondary market.

The general principle holds: if the workload is predictable and sustained, owning financed hardware is dramatically cheaper than funding cloud spend from equity. If demand is uncertain, the flexibility of cloud is worth paying for. Our guide to AI company funding covers how this interacts with gross margin.

4. What the Dilution Comparison Actually Looks Like

The argument for financing equipment is usually made in the abstract. It is more persuasive with the arithmetic in front of you.

Take a hardware company at seed stage that needs a production line. Two routes:

Route one — fund it from the round. The equipment cost is simply part of what you raise, so it comes out of the round at the round's price. Every dollar spent on machinery is a dollar of equity sold at seed-stage valuation — which is to say, at the cheapest valuation the company will ever have. Those shares are gone permanently, and they dilute every future outcome.

Route two — finance the equipment and raise less. You put down a deposit, borrow the balance over a term matched to the asset's life, and reduce the round accordingly. You now pay interest, which is a real cost, and you carry a monthly obligation, which is a real risk. But the shares you did not sell stay with you and your team.

The comparison that matters is not “interest versus zero”. It is interest over the loan term versus the value of the equity you would have sold to avoid it. For a company that grows, the second number is almost always far larger, because seed-stage equity is priced at seed-stage risk and the machine is not a seed-stage risk — it has a resale market and a known depreciation curve.

Two honest qualifications. First, this only holds if the company survives to the point where the equity would have appreciated; debt on a company that fails is worse than dilution on a company that fails. Second, the monthly payment consumes runway from day one, which shortens the time you have to reach the next milestone. That is the genuine trade-off, and it is why the sensible position is to finance the assets with resale markets and use equity for everything else — the payroll, the R&D, the market development that no lender will ever touch.

The related point most founders miss: equipment finance is generally not counted against your venture debt capacity in the way founders assume, because it is secured on a specific asset rather than on enterprise value. Structured properly it can sit alongside a venture debt facility rather than competing with it — but only if the lien positions are sorted out in advance, which is the subject of the negotiation section below.

5. Pricing and Structure

• Rate. Generally lower than venture debt, because the loan is secured on a saleable asset. Fixed or floating.
• Term. Matched to useful life — commonly three to seven years. A term longer than the asset's life is a red flag for both parties.
• Advance rate. How much of the purchase price is financed. Higher for standard equipment with strong resale, lower for specialist items.
• Residual value. In an operating lease, what the lessor assumes the asset is worth at term end. A higher assumed residual means lower payments — and it is the lessor's risk, which is why they scrutinise the secondary market so carefully.
• End-of-term options. Read these carefully. A nominal purchase option is economically ownership. A fair-market-value purchase option means you may pay substantially more to keep equipment you have already largely paid for.
• Fees — documentation, appraisal, UCC filing.

6. Terms Worth Negotiating

• Personal guarantees. Frequently requested and worth resisting hard. A guarantee turns a company obligation into a personal one that survives the company. Offer a larger deposit, a shorter term or a higher rate instead — and note that no insurance product protects you from a guarantee you signed.
• Cross-default and cross-collateralisation. A default on one facility triggering default on others, or the lender taking security over assets beyond the financed equipment. Narrow both.
• The blanket lien question. Some lenders want security over all company assets rather than only the equipment. This can conflict directly with a venture debt facility or a future private credit line, whose lenders expect first position. Establish who has priority before signing anything.
• End-of-term purchase option — fix the price now rather than leaving it to a later valuation.
• Early buyout rights, if you may want to own the asset sooner.
• Relocation and use restrictions. Some agreements restrict moving equipment between sites, which matters if you may relocate.
• Insurance requirements — you will be required to insure the asset and name the lender. Check this against your existing cover.

7. The Tax Dimension

Lease-versus-buy is partly a tax question, and the answer varies with your situation.

• Ownership structures — loans and capital leases — generally allow depreciation deductions, and provisions permitting immediate or accelerated expensing of qualifying equipment can make the first-year deduction substantial.
• Operating leases generally produce deductible rental payments instead.
• For a loss-making company, deductions are worth less now than they would be later, which can favour structures that spread the benefit. This is a genuine and frequently overlooked input.

Expensing rules and thresholds change with legislation and are periodically adjusted. Get the specific analysis from your accountant before choosing a structure — the difference is real money.

8. How to Approach It

1. Get the equipment quote first. Lenders finance against a specific asset with a specific price.
2. Ask the vendor about financing before going elsewhere. Frequently the cheapest and fastest.
3. Approach two or three specialist lessors in parallel. Terms vary substantially and this market is competitive.
4. Check with your existing lenders. If you have venture debt or a credit facility, confirm the equipment financing does not breach a negative covenant on additional indebtedness or liens.
5. Compare total cost, not payment size. A low monthly payment with a large fair-market-value buyout can be the most expensive option.
6. Budget the excluded costs — freight, installation, commissioning, training.

Frequently Asked Questions

Can a pre-revenue startup get equipment financing?

Sometimes, particularly with a recent funding round, a strong investor base, a larger down payment, or a personal guarantee. The asset's resale market matters more than your revenue, but lenders still need confidence you can make payments. A recently closed round is the strongest supporting evidence.

Is leasing cheaper than buying?

Not usually in total cost. Leasing is cheaper in cash flow and transfers obsolescence risk to the lessor. Buy what holds its value and you will use for years; lease what depreciates fast or that you may not need long.

Does this affect our ability to raise venture debt?

It can. Venture debt lenders generally want a first-position blanket lien and will look closely at existing security interests. Sequencing matters — discuss both facilities with both lenders rather than closing one and surprising the other.

What happens if we fail?

The lender repossesses and sells the equipment. If proceeds fall short, the deficiency remains a claim against the company — and against you personally if you gave a guarantee. This is precisely why guarantees deserve resistance.

Can we finance equipment already purchased?

Yes, through a sale-leaseback, provided the equipment is reasonably recent and unencumbered. It is one of the more useful and least-known routes to non-dilutive cash for a company that funded assets from an earlier round.

How long does the process take?

Faster than almost any other credit product — frequently one to three weeks from quote to funding for standard equipment, and sometimes days through a vendor's captive finance arm. The speed comes from the underwriting being largely about the asset, which the lender already understands, rather than about your business, which they would otherwise have to learn. Bespoke or unusual equipment takes longer because an appraisal is needed.

What documents will a lender ask for?

Typically the equipment quote or invoice, recent financial statements or management accounts, bank statements, your cap table and details of your most recent funding round, and your existing debt and lien position. For a venture-backed company the funding round evidence does a lot of work — it demonstrates both runway and investor support. If you have existing facilities, expect to produce those agreements so the lender can assess lien priority.

Should we finance or lease if we might be acquired?

Check the assignment and change-of-control provisions before signing, because they vary and some agreements accelerate on a change of control. An acquirer generally either assumes the facility or pays it off at closing, and neither is usually a problem — what causes friction is a clause the buyer discovers in diligence that nobody anticipated. Equipment finance is rarely a deal issue; an undisclosed personal guarantee or an unusual acceleration clause occasionally is.

Can we finance equipment for a facility outside the US?

Harder, and the reason is enforcement. A lender's security is only as good as their ability to repossess, which means cross-border arrangements need local counsel, local security registration and frequently a local lender partner. Vendors with international operations are often the most practical route, since their captive finance arms already operate in multiple jurisdictions. Budget more time than a domestic transaction.

Does equipment finance show up as a red flag to equity investors?

No — the opposite, usually. Investors generally prefer to see a founder financing assets with debt rather than burning equity on machinery, because it means more of their money goes to the things that create enterprise value. What they will look at closely is whether you have given a blanket lien over all company assets, which constrains future financing, and whether the payment schedule is realistic against runway. Both are avoidable in the negotiation.

The Bottom Line

Equipment with a resale market should be financed with debt, not equity. The pricing is better than venture debt, the process is faster than most credit, and the vendor may fund it themselves.

Resist personal guarantees, narrow any blanket lien, fix the end-of-term purchase price, and check the tax structure before deciding between lease and buy. And if you already own machinery bought with equity, look at a sale-leaseback.

Global Capital Network connects capital-intensive founders with equity investors and specialist lenders through our network and events. Get in touch.

This article is general information, not financial, legal or tax advice. Lease and tax treatment is fact-specific. Work with qualified advisers.