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Huntington Beach, CA Equipment loans and leases can be found on most company balance sheets across a broad range of industries. How equipment loans are procured are different however. For the discussion purposes of this blog, we are going to focus on equipment loans and leave equipment leases for another discussion.

Term Loans Secured By Equipment
Equipment purchases often require financing. If you are looking to own your equipment, the equipment loan lender will analyze the cost of the equipment, useful life of the equipment and the amount of your down payment to be applied toward the purchase. They will also take in to account the other debts of the business. The existing term debt of the business covering any real estate, business loans, and other monthly payment obligations will be added to the new monthly payment for the desired equipment purchase to derive a total monthly debt obligation number. This total monthly debt number will be divided by the income of the company to come to what is known as debt service coverage.

Equipment lenders have a range of debt service coverage they like to see in order to approve a new equipment loan request. Debt service ratios are the ratios that tell the lender how much available income a company has in order to be able to take on new debt. For example, a ratio of 1.25:1 signifies that the company has $1.25 for every $1.00 in debt or a 25% margin before debt starts to chew in to profits.

The number of years the equipment loan is for will be determined by the useful life of the equipment. The longer the useful life, the longer the term for repayment will be. For example, the average equipment loan is for 5-7 years (think of an automobile loan) whereas other term loans are for as much as 30 to 40 years (as in the case of a residential loan).

Simply put, in order to qualify for an equipment loan, you have to show the ability to make the payments. But what if you can’t show the ability to make the payments? What if you’re a startup or in the middle of a financial turn around and showing losses while you work the company back to profitability? Enter asset based equipment loans.

Asset Based Equipment Loans.

Asset based equipment loans are loans secured against equipment either for working capital or acquisition purposes. Lenders in this space will be looking at the value of the equipment and provide a loan against that value. Because they lend to companies that are either startup operations or showing losses and in a turn around mode, they are more conservative in the loan amounts they extend.

Let’s look at this a little closer. If you have equipment with a market value of $100,000, your wholesale value may be $80,000 and your liquidation value may be $50,000 (of course these numbers are just for illustration purposes as there are far too many variables to cover). An asset based equipment lender will look at your liquidation value and lend on a percent of that value. They will look at the $50,000 liquidation value, lend $35,000 – $40,000 and take the equipment as collateral.

You may say that this is a conservative number when you look at the market value of $100,000 and you would be right. Why so conservative? You need to keep in mind that these lenders are lending to companies that are either losing money or in a startup phase. We know that the majority of startups fail and that there is no guarantee the company coming out of a restructure will hit their projections. The only way a lender can ensure that they will get their money back is if they can sell the equipment at a level above their loan amount.

These asset based equipment loans in many cases represent the only way to get the working capital many startups and turn around companies need to get to the next level and on to financial stability.

Some lenders are also in the auction business and all have a highly tuned skill of estimating value on a broad range of equipment types. They take high risk for high return. These loans will cost more than traditional funding due to the inherent risk involved in the space they serve. They represent the bridge many companies need to get to profitability.

Equipment Finance Quotes specializes in securing equipment loans for companies of all sizes and range of financial strength. If your company is in the market for an equipment loan, we would like to serve you. We have access to a multitude of equipment lenders for need. We save you the time, energy and frustration of finding the right equipment loan and handle it for you.

To your success!

Patrick Zazueta | Founder
Equipment Finance Quotes
714-719-8966