Yes, if your credit agreement allows it, and most do within limits. A senior lender's blanket lien and negative covenants would otherwise block new secured debt, so the agreement carves out purchase-money equipment loans and capital leases through a permitted-debt basket and a matching permitted-lien basket, each capped at a stated amount. The equipment lender takes a first lien on only the equipment it finances. That debt still counts toward total leverage and fixed charges, so it uses covenant room even though the senior lender's own exposure doesn't change. Negotiate the basket size at closing, against your capex plan.
- What makes it possible
- Permitted-debt and permitted-lien baskets in the senior credit agreement
- What the equipment lender gets
- A first lien on the specific equipment financed, and its proceeds
- Counts in total leverage?
- Yes, equipment loans and capital leases are usually funded debt
- Counts in fixed charges?
- Yes, its payments sit beside the senior loan's
- When it saves money
- Asset-heavy businesses whose equipment holds its value
- When to decide
- At closing of the senior facility, when the basket is set
Why a senior lender's documents block it by default
A senior credit facility usually comes with a blanket lien on all of the company's assets, including equipment it buys later. On top of the lien, the credit agreement has two negative covenants that matter here: a limit on indebtedness, which says the company may not borrow except as permitted, and a limit on liens, which says it may not grant a security interest to anyone else except as permitted. Many agreements also carry a negative pledge. Break either covenant and you have an event of default, even if every payment is current.
So the question is never whether equipment financing is allowed in general. It is whether your agreement's list of exceptions, called baskets, has room for the specific loan or lease you want, and whether the lien the equipment lender takes fits the permitted-lien list.
The baskets that make room for equipment
Credit agreements differ, but equipment financing usually fits through one of the carve-outs below. Read yours with the exact wording in front of you; a lease can fit one basket and not another.
| Basket | What it permits | What to watch |
|---|---|---|
| Purchase-money debt and capital leases | Loans used to buy equipment, and finance leases, up to a stated amount outstanding at any time | The cap covers all such debt together, including debt you already have |
| Permitted liens for purchase-money debt | A lien on the financed equipment only, securing only that debt | The equipment lender must not take a lien on anything else, or cross-collateralize |
| Existing debt schedule | Equipment notes and leases listed at closing, and their refinancing | Anything not on the schedule has to fit a basket; see building a debt schedule |
| General debt basket | Any debt up to a smaller stated amount | Often shared with other needs; using it for equipment leaves less for anything else |
| Operating leases | Usually not debt under the agreement | Newer lease accounting puts operating leases on the balance sheet; a frozen-GAAP clause keeps them out of debt |
The equipment lender's lien usually has priority on the financed equipment even though the senior lender filed first, because a purchase money security interest takes priority over an earlier blanket lien on the same item when it is perfected on time. Some senior lenders still want a short acknowledgment or release covering those specific assets. A full intercreditor agreement is rarely needed for ordinary equipment debt.
Larger or better-negotiated facilities sometimes use a basket that grows with the business, set as the greater of a fixed amount and a share of total assets. Smaller facilities usually have a fixed cap. Either way, the cap is the number to plan around.
How equipment debt counts toward leverage
The senior lender's exposure doesn't change when you finance a truck elsewhere. Your covenants do. Equipment loans and capital leases are almost always funded debt in the total leverage ratio, and their payments count as fixed charges. Whether they also count in senior leverage depends on how the agreement defines it; the difference is explained in senior leverage vs total leverage.
A worked example in plain numbers. A company has EBITDA of 1,000, a senior term loan of 2,500 and equipment loans of 600. Its total leverage covenant is 3.5x, so total debt must stay at or below 3,500. It has 400 of room. The purchase-money basket is capped at 750, so there is 150 of room there.
| Today | Add 500 of new equipment debt | Add 500, with EBITDA from the new equipment of 150 | |
|---|---|---|---|
| Senior term loan | 2,500 | 2,500 | 2,500 |
| Equipment debt | 600 | 1,100 | 1,100 |
| Total debt | 3,100 | 3,600 | 3,600 |
| EBITDA | 1,000 | 1,000 | 1,150 |
| Total debt allowed at 3.5x | 3,500 | 3,500 | 4,025 |
| Leverage covenant | Passes | Fails by 100 | Passes |
| Purchase-money basket of 750 | 150 of room | Exceeded by 350 | Exceeded by 350 |
Two lessons come out of the table. First, the basket and the leverage covenant are separate limits, and you can hit either one first. Second, equipment bought to grow earns its EBITDA over time, but the debt counts from the day it is drawn. That timing gap is where companies breach, which is why covenant headroom matters more in capital-intensive businesses.
Fixed charge coverage treats equipment spending in a way owners often miss. Capex funded with new equipment debt is usually excluded from the capex deduction, because the lender is not counting it as cash spent, but the equipment loan's payments are included as fixed charges. Capex paid from cash is deducted in full. See maintenance vs growth capex for how lenders separate the two.
When separate equipment financing lowers your overall cost
Equipment lenders underwrite the asset as well as the business. When the equipment holds its value and can be resold, they can price the loan on that collateral, and amortize it over the equipment's useful life. A senior cash-flow lender, by contrast, prices every dollar it lends on the company's earnings, and a loan stretched to cover the equipment as well is priced for the higher leverage, often by moving to a unitranche or private credit lender. Moving asset-backed borrowing to an asset-backed lender can keep the senior loan within bank limits and lower the blended cost of the stack.
- It usually helps when the equipment is standard and resellable, such as trucks, trailers, construction equipment or common machine tools; when a manufacturer or dealer offers subsidized financing; when a longer amortization matched to the equipment's life lowers annual payments compared with a faster-amortizing term loan; and when it preserves revolver availability or a delayed-draw facility for other needs.
- It usually doesn't when the equipment is specialized and hard to resell, so the equipment lender charges for that risk; when the senior lender is already pricing cheaply and would fund the equipment inside its loan; when the company has an asset-based line whose borrowing base already counts machinery and equipment; or when a small basket means every new piece of equipment needs the senior lender's consent anyway.
The honest comparison is the full cost of each route: rate, fees, amortization and what each does to covenant room. A lower rate on the equipment loan is worth less if it pushes total leverage close to the limit and costs you flexibility for the rest of the term. What a layered capital stack actually costs walks through the arithmetic.
What else ties the loans together
Separate lenders do not mean separate risks. The senior credit agreement almost always has a cross-default to other debt above a threshold, so a missed equipment payment can put the senior facility in default. Equipment lenders may cross-default to the senior loan in return. Equipment kept at a leased site may need a landlord waiver for both lenders. And if you ever sell or refinance, the equipment debt needs its own payoff letter or a consent to stay in place.
Leases need the same attention as loans. A dollar-buyout lease is usually a capital lease that counts as debt, while a fair-market-value lease may not, depending on the agreement's definitions; the differences are in FMV lease vs dollar buyout lease and equipment lease vs equipment loan.
Negotiate it at closing, not later
The best time to make room for equipment financing is while the senior facility is being negotiated, when the lender wants to win the deal. After closing, every increase is an amendment, often with a fee and always on the lender's timetable. Bring these to the term sheet stage:
- A capex plan for the life of the loan, split between maintenance and growth, with how each will be funded.
- A purchase-money and capital-lease basket sized to that plan, not to today's balance.
- A permitted-lien basket that matches it, limited to the financed equipment.
- Operating leases kept out of debt, with a frozen-GAAP clause if the agreement tests leverage on the balance sheet.
- A leverage covenant with enough headroom for the equipment you expect to finance before its earnings show up.
- A complete schedule of existing equipment notes and leases, so nothing you already have has to squeeze into a basket.
Transparent's lender book includes 244 lenders that write equipment and 1,148 that write term and private credit, so both halves of the structure can be taken to market together and compared, rather than accepting whichever offer arrives first. The financing model in the lender package shows leverage and fixed charge coverage with the equipment debt in, so the senior lender sizes its baskets against the real plan.
Common questions
- Do I need my senior lender's permission to finance equipment elsewhere?
- Not if the loan or lease fits within the agreement's permitted-debt and permitted-lien baskets. If it doesn't fit, you need a consent or an amendment. Check the basket's current usage before you sign with the equipment lender.
- Does equipment financing count as debt in my leverage covenant?
- Equipment loans and capital or finance leases usually do. Operating leases usually don't, but check whether the agreement uses frozen accounting definitions, since newer lease accounting puts them on the balance sheet.
- Who has first claim on the equipment, the senior lender or the equipment lender?
- Usually the equipment lender, on the specific equipment it financed, because a purchase money security interest perfected on time takes priority over an earlier blanket lien. The senior lender keeps its lien on everything else.
- Is it cheaper to finance equipment separately or inside the senior loan?
- It depends on the equipment and the senior loan's pricing. Resellable equipment financed over its useful life often costs less separately; specialized equipment often doesn't. Compare the full cost, including what each route does to covenant room.
- What happens to equipment loans when I refinance the senior facility?
- They can stay if the new agreement permits them, which is why they belong on the debt schedule from the start. Otherwise they are paid off at closing. Either way, the new lender will want to see every equipment note and lease.