As businesses continue to try and climb out of the 2008 recession, the process of refinancing used equipment comes up more and more with business owners.
Many small and medium sized businesses have considerable capital tide up in their existing equipment and want to try and explore ways to getting more financing or debt leverage out of their assets while retaining them for their own use.
This leads many business owners and managers to consider used equipment refinancing options.
The starting point here for most is to get a better understanding of what’s available in the market for these types of transactions.
One of the first things that business owners discover is that there are not a lot of equipment financing companies out there that will consider used equipment financing requests.
And the ones that do tend to fall into one of three different categories with respect to refinancing rates and terms.
The first category are lenders or leasing companies that will consider used equipment refinancing requests for companies that are in a stable operating position and require the incremental capital out of their equipment for growth, asset replacement or up grade, or debt consolidation of some sort.
For this first group, the effective annual interest rate for an equipment financing facility is in the 9% to 12% range, the loan or lease term in the two to five year range depending on the remaining useful life of the asset, and the loan to value between 50% and 75% of the forced liquidation value for the equipment in question.
The second category of lenders will consider businesses that have been struggling, but have very good potential to be able to improve their situation over time. The used equipment refinancing rates in these situations are more in the 12% to 18% range, the financing terms two to three years, and the loan to value 50% to 60% of forced liquidation value.
The third category of lenders are more focused on companies that are in distress. These lenders typically have their own auction houses or liquidation services, or are closely aligned with one, and are prepared to deal with a scenario where there is a reasonable chance that the business will not survive before the end of the financing term. The used equipment refinancing rates for this category of lender are in the 18% to 24% range, lending terms typically two years, and financing amounts around 50% of forced liquidation value.
From the information above, one can see that the cost of financing for used equipment refinancing is not exactly cheap, and the more unstable your operating condition, the higher the financing rates are to offset risk.
That being said, even at higher rates, this can be a welcome source of financing, especially if other sources have been exhausted.
The other key takeaway to individuals getting up to speed on this type of equipment financing is that the loan to value amounts are not going to be very high in most cases. As an example, a good of assets that are worth $1,000,000 in the market under an orderly liquidation appraisal would likely be able to generate $400,000 to $500,000 in financing under a used equipment refinancing program.
Part of the reasoning for this is that the lender is working off of an estimate of market value from an appraiser and tends to be more conservative as a result.
Used equipment financing tends to provide higher loan to value or lease to value amounts when there is a purchase is involved as the buy/sell transaction yields an actual market value for the asset as compared to an appraised value.
The main key is to have a proper assessment done of both your requirements and what you have to offer an equipment financing company so that you can focus in on the most relevant options to determine if used equipment refinancing makes sense for your business.