Business Lines of Credit vs Equipment Loans for Construction Firms

Business Lines of Credit vs Equipment Loans for Construction Firms

In the construction world, timing is everything—whether you're managing a job site, juggling payroll, or racing to secure new equipment before the next big contract. And when you need access to capital, two of the most powerful tools in a contractor’s financial toolbox are equipment loans and business lines of credit.

But these financing options serve different purposes, and choosing the wrong one can put unnecessary pressure on your cash flow—or worse, cost you jobs.

This guide breaks down the pros, cons, and ideal use cases of business lines of credit vs. equipment loans, so you can make the smartest decision for your construction firm in 2025 and beyond.

The Short Answer: What’s the Difference?

At a high level:

• An equipment loan is a lump sum of money used to purchase a specific piece of machinery. You repay it in fixed monthly installments over a set term.
  
  
• A business line of credit (LOC) is a revolving pool of funds you can draw from at any time and repay as needed. Think of it as a flexible cash reserve.
  
  

Both options can fuel your business—but they work best for different financial needs.

Equipment Loans: Purpose-Built for Big Purchases

Equipment loans are tailored to help construction firms finance heavy machinery like excavators, cranes, or bulldozers. The equipment itself acts as collateral, which helps reduce risk for the lender and makes these loans easier to qualify for—even if your credit isn't perfect.

Key Features:

• Fixed interest rates and monthly payments
  
  
• Loan terms typically range from 2 to 7 years
  
  
• Down payments range from 5% to 20%
  
  
• Ownership transfers to you at the end of the loan
  
  
• Eligible for Section 179 tax deductions
  
  

Best for: Long-term equipment purchases you plan to use frequently for years to come.

Pros:

• Predictable payments simplify budgeting
  
  
• Builds equity in the asset
  
  
• Can improve job capacity and bid eligibility
  
  
• Often easier to qualify for than unsecured loans
  
  

Cons:

• Less flexible—funds must be used for a specific machine
  
  
• Monthly payments are required regardless of cash flow
  
  
• Down payment may be required upfront
  
  

Business Line of Credit: The Swiss Army Knife of Financing

A business line of credit provides ongoing access to funds you can use for just about anything—repairs, materials, temporary labor, or even equipment down payments. You only pay interest on the amount you borrow, not the total credit limit.

Key Features:

• Revolving credit (reuse as you repay)
  
  
• Interest-only payments may be available
  
  
• Credit limits typically range from $10,000 to $500,000
  
  
• No collateral required in many cases
  
  
• Can be used for multiple business needs
  
  

Best for: Managing cash flow, covering short-term expenses, or supplementing equipment purchases.

Pros:

• Flexibility to draw only what you need
  
  
• Quick access to working capital
  
  
• Interest-only repayment options with some lenders
  
  
• Great safety net for seasonal businesses
  
  

Cons:

• May have higher interest rates than equipment loans
  
  
• Credit limits may not cover large equipment costs
  
  
• Can be more difficult to qualify for with limited revenue or weak credit
  
  

Learn more about how business lines of credit work in this Investopedia article.

When to Use One vs. the Other

Use an equipment loan when:

• You’re buying a high-cost piece of machinery ($30,000+)
  
  
• You plan to use the equipment consistently over many years
  
  
• You want to build equity in the machine
  
  
• You’re looking for predictable, structured repayments
  
  

Use a business line of credit when:

• You need flexible capital for various expenses
  
  
• You’re making partial equipment upgrades or repairs
  
  
• Your business has seasonal or unpredictable cash flow
  
  
• You want a funding safety net between projects
  
  

Real-World Example: Combining Both for Strategic Growth

Jared runs a small site development company in the Midwest. He used an equipment loan to finance a new crawler excavator—locking in a 5-year term at a fixed monthly payment. But he also opened a $75,000 line of credit to cover attachments, maintenance, and the occasional delay in client payments.

That combination gave him both structure and flexibility—allowing him to scale his business without compromising liquidity.

Key Considerations When Choosing Between the Two

1. Upfront Cost
If you don’t have cash for a down payment, a business line of credit might help—but it may not cover the entire purchase price of a large machine. In that case, use the LOC for the down payment and finance the rest.

2. Tax Treatment
Equipment loans often qualify for Section 179 deductions. Business lines of credit don’t—though interest paid may still be deductible as a business expense under IRS guidelines.

3. Speed of Funding
Business lines of credit can often be approved and funded in under 48 hours. Equipment loans may take longer, especially if they require documentation from a vendor or appraisal for used equipment.

4. Credit Impact
Both affect your credit, but a line of credit that’s near its limit can weigh on your utilization ratio and score. With an equipment loan, you know exactly how the balance declines each month.

5. Lender Specialization
Work with lenders who understand construction. Equipment-focused lenders may offer better terms, while LOC providers that serve contractors can be more flexible with cash flow-based underwriting.

Final Thoughts: The Right Tool for the Job

Just like you wouldn’t use a skid steer to move steel beams, you shouldn’t use the wrong financing tool for your business needs. Equipment loans and business lines of credit both offer value—but in different ways.

Need to purchase a machine with long-term ROI? Choose an equipment loan.
Need flexibility to manage seasonal expenses or fund small upgrades? Go with a line of credit.

And sometimes, the best solution is both—each supporting different parts of your construction operation.

Want help figuring out what works best for your business? Contact National Legacy Capital Group for expert advice on equipment loans, credit lines, and financing solutions tailored to how construction companies actually work.

Frequently Asked Questions (FAQ)

Can I use a business line of credit to buy equipment?
Yes, but it depends on your credit limit. Lines of credit are better suited for smaller purchases, upgrades, or down payments—not large machines.

Do equipment loans affect my business credit?
Yes. Like any loan, it appears on your credit report and can help build business credit when paid on time.

Can I refinance my equipment loan into a line of credit?
Typically no. They serve different purposes. However, you may be able to open a line of credit to support cash flow while repaying your loan.

What’s the typical interest rate on a line of credit vs a loan?
Equipment loans often have lower fixed rates (7%–12%). Lines of credit may have variable rates starting around 10%–20%, depending on credit and lender type.