Using Equipment Financing to Help Fund a Business Acquisition in Ontario

When the business you're buying owns real equipment — manufacturing machinery, commercial vehicles, kitchen equipment, heavy tools — that equipment isn't just something you're acquiring. It's also something a lender may be willing to lend against. Equipment financing uses the value of specific, identifiable assets as collateral, which can make it easier to fund part of a purchase than relying entirely on a general business loan.

This article explains, in general terms, how equipment financing typically fits into a business acquisition, and the due-diligence steps a buyer should take before counting on it.

Why Lenders Like Equipment as Collateral

A general business loan is secured, broadly, against the business's overall assets and cash flow — harder for a lender to value precisely and harder to recover if things go wrong. Specific equipment is different: it usually has an identifiable value, a resale market, and a clear paper trail (a bill of sale, a make/model/serial number, sometimes an appraisal). That makes it comparatively straightforward collateral, which is part of why lenders are often willing to extend equipment-secured financing even to a buyer without an extensive track record.

How Equipment Financing Typically Fits Into an Acquisition

1. Identify what's actually being financed. Is the equipment financing meant to fund part of the overall purchase price (with the equipment itself as security), or is it a separate facility to replace or upgrade equipment after closing? These are different transactions, even though both are called "equipment financing."
2. Value the equipment realistically. A lender will typically want its own valuation or appraisal rather than relying on the number in the purchase agreement, particularly for used or specialized equipment.
3. Check for existing liens first. Before counting on a piece of equipment as clean collateral, confirm it isn't already subject to an existing security interest from the seller's own lender or an equipment lessor. This is done through a Personal Property Security Act (PPSA) search against the seller (and, where relevant, against the equipment itself).
4. Decide whether to assume or refinance existing equipment debt. If the seller has an existing loan or lease against a piece of equipment, you'll generally need to either have it paid out and discharged at closing, or negotiate an assumption of that obligation — the two paths have very different implications for your own financing and for the purchase price.
5. Coordinate with your overall financing package. Equipment financing is often layered alongside a term loan for the balance of the purchase price and a line of credit for working capital — your lawyer and lender should be looking at the whole picture, not just the equipment piece in isolation.

Buyer Diligence Checklist

• [ ] Get an inventory list of the equipment being purchased, with make, model, and serial numbers where available
• [ ] Confirm equipment condition — inspection or third-party appraisal, not just the seller's representation
• [ ] Run a PPSA search against the seller to check for existing registered security interests
• [ ] Confirm whether any equipment is leased rather than owned by the seller (leased equipment generally can't simply be "sold" to you — it needs a lease assignment or a new lease)
• [ ] Ask your lender directly whether it will finance against the specific equipment being purchased, and on what terms it requires the security to be structured

Where This Gets Complicated

• Leased, not owned, equipment. If the seller leases key equipment rather than owning it outright, that equipment isn't the seller's to sell — you'd instead need the lessor's consent to an assignment, or a new lease in your name. This should be flagged early, since it changes what's actually available as loan collateral.
• Equipment subject to an existing loan. A registered lien against equipment doesn't necessarily disappear just because ownership of the business changes hands — it generally needs to be addressed (paid out and discharged, or expressly assumed) as part of closing.
• Mixed asset pools. In many small business sales, equipment is bundled with inventory, goodwill, and other assets in a single purchase price. Isolating the equipment's value for financing purposes may take a separate appraisal rather than relying on however the purchase agreement allocates price internally.

Frequently asked questions