There are times when a business has considerable equity in their existing assets would like to undergo equipment refinancing to leverage that equity for working capital, debt consolidation, or business expansion.
In order to accomplish this, the business can either get a term or demand loan against the identified assets or undergo a sale and leaseback transaction with a leasing company.
With respect to a term or demand loan, this is can be provided by any number of financial institutions, but regardless of the lender you speak to, this type of equipment refinancing will only take place if the existing cash flow of the business is capable of servicing the debt.
If the business is in a situation of distress or development, where cash flow is projected to be solid, but isn’t at the present time, it is less likely that a term or demand loan can be secured.
An equipment loan provides very little financial disruption to the business as the equipment pledged as security remain in the ownership and control of the business owner or owners.
A term or demand loan lender will also require first position security so it will be important that no general security agreement is in place against all business assets, or the GSA holder is prepared to remove the equipment you want to refinance from their GSA.
A sale and leaseback transaction will require the sale of the equipment to a leasing company in exchange for a capital or operating lease and the exclusive right to use the equipment for the term of the lease. Most sale and leaseback transactions provide capital leases where the business will repurchase the equipment at the end of the lease for a nominal cost.
Because of the change of ownership requirements, sale and leaseback transactions can trigger income tax effects so its important to review a proposal for this type of equipment refinancing with your accountant before going forward.
Asset based lenders and leasing companies that offer sale and leaseback equipment refinancing will consider situations where the business has cash flow distress or is looking at expansion to increase cash flow. The effective financing rates in these situations will be higher than for a company with a stable cash flow.
The amount of business financing that can be secured for either loan or lease is going to range from 50% to 75% of forced liquidation value of the equipment that you want to refinance.
The forced liquidation value will be established either by a third party appraiser or through the lender’s own internal equipment appraising resources.
Terms for repayment will typically range in the three to five year period, depending on the assets and the financial and credit profile of the business.
If you are in need of equipment refinancing or want to know more about it, please give me a call and we’ll go over your requirements together as well as potential options that may be available to you.