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Soft costs
Also called soft cost financing, indirect costs, non-equipment costs.
In equipment finance, everything on the invoice that is not the machine — freight, rigging, installation, training, software, tax — which lessors cap or refuse because none of it can be repossessed.
Drafted with AI assistance. Not yet independently checked. Nobody has verified the claims on this page against a source, so treat the figures and legal points as a starting point rather than as settled, and confirm anything you are about to act on. How we check things.
What it means
The phrase has two settled uses and they do not overlap.
In equipment finance
Soft costs are the parts of the project with no resale value: freight and rigging, electrical and plumbing work, installation and commissioning, operator training, software licences, extended warranties, sales tax, and sometimes the first year of a maintenance contract. If the deal defaults, a remarketer can take the machine but not the concrete pad it is bolted to or the week your staff spent learning it.
The practical result is a limit. Many lessors cap the soft cost portion as a percentage of the amount financed; others finance the equipment only and expect soft costs in cash. Where soft costs are heavily loaded, pricing worsens too, because recovery in a default is lower against the same exposure.
In construction and commercial real estate
Soft costs are architecture and engineering, permits and impact fees, legal, insurance, financing fees, interest during construction, marketing and developer overhead — everything except the physical building, which is hard cost. Construction lenders budget them on separate lines, draw them on different logic, and usually require the borrower's equity to go in before soft cost draws begin.
A tax note
Soft costs are frequently capitalised into the asset's basis rather than expensed as incurred, which matters when you are relying on a Section 179 election to make the purchase work. Ask your accountant which of your soft costs are part of basis and which are current deductions.
Where this one catches people
The number the vendor quotes and the number the lessor will finance are different, and the difference lands on you in cash, usually in the week the machine ships.
A 200,000 machine with 40,000 of freight, electrical and installation is a 240,000 project. A lessor capping soft costs at 15 percent of the amount financed will not fund 240,000 — the arithmetic caps it lower, and you write a cheque for the rest at exactly the moment your working capital is committed elsewhere.
Two defences. Ask the lessor for its soft cost policy in writing before you sign the purchase order, not after. And ask the vendor to split the quote into equipment and non-equipment lines, so the lessor, the vendor and you are all working from the same figures rather than discovering the gap at delivery.
Worked through
Illustrative. Equipment 200,000. Freight and rigging 12,000, electrical 18,000, installation and commissioning 7,000, operator training 3,000. Project total 240,000, of which 40,000 is soft cost — 16.7 percent of the project.
The lessor caps soft costs at 15 percent of the amount financed. If the amount financed is F and hard cost is 200,000, then 0.85F = 200,000, so F = 235,294, of which 35,294 is soft cost.
The lessor funds 235,294. You pay the remaining 4,706 at delivery.
A lessor that will not finance soft costs at all funds 200,000, and you find 40,000. Same machine, same vendor, same day — a 35,000 difference in what you have to produce in cash, decided by a policy nobody mentioned.
Figures in the example are illustrative. They show the arithmetic, not a quote — what any one lender would charge is on that lender's page, where it is published at all.
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Soft costs — common questions
What does soft costs mean?
In equipment finance, everything on the invoice that is not the machine — freight, rigging, installation, training, software, tax — which lessors cap or refuse because none of it can be repossessed.
Where does soft costs catch people out?
The number the vendor quotes and the number the lessor will finance are different, and the difference lands on you in cash, usually in the week the machine ships.
Is soft costs the same as an interest rate?
Soft costs is defined above; if you are comparing it against a rate, check whether the two measures share a time dimension before you put them side by side.
Which products does soft costs apply to?
Term Loan, SBA Loan, Equipment Financing.
Is there a worked example of soft costs?
Yes, on this page, and it is labelled illustrative. It shows the arithmetic, not a quote from any lender.
What else should I read alongside soft costs?
Closing costs, Equipment finance agreement, Equipment financing, Hard costs, Liquidation value.
Has this definition been checked?
Not yet. This entry is drafted and live, and the notice at the top says so. Confirm anything you are about to act on.
Is this legal advice?
No. It is a definition. What a clause does in your contract, in your state, is a question for a lawyer licensed where you are.
Can I suggest a term?
Yes — [email protected]. The glossary grows from what people are actually shown in contracts.