One of the logical conclusion business owners have drawn in the last couple years during which cash flow has been tight for many is that they should be able to refinance the equity in their equipment to inject capital back into the cash flow.
In many cases, more established businesses with long life use assets have paid off any loans or leases owing and hold clear title to the equipment.
But while this is logical to the business owner, its not so automatic with financing providers.
The key to this type of financing is the same as any type of financing, and that’s cash flow.
If the financing is required to prop up cash flow, then there are going to be less interested parties to provide the required debt financing and those that are interested are going to charge more for the associated risk.
As a result, refinancing equipment is not an easy game at all, especially in Canada with U.S. lenders being more open to the idea.
For the small to medium sized business owner, the challenges start with amount of financing versus security value.
To start with, most debt financing sources that will provide equipment loans and leases to refinance existing equipment will not fund more than 40% to 60% of the forced liquidation value of the assets in question.
When you’re in a depressed market period where the used equipment market is flooded with inventory, the forced liquidation value may only be 50% or less of what the business owner believes is the long run fair market value.
So if I believe my equipment is worth $100,000 and the forced liquidation value is 50% of that, and the lender will only lend 50% of forced liquidation, I’m now looking at potentially securing $25,000 against assets owned free and clear.
But for these smaller amounts of financing, the only lenders that tend to consider these applications are ones that can be convinced that better days are ahead and that the business is either stable or in a growth position versus being in distress.
With larger financing requests of $250,000 or more, the refinancing can still be done through an asset based lender even if the business is in a distressed situation, but the rates and fees are going to be substantially higher due to the higher risk of business failure and loan loss.
So if you’re looking at your equipment as a source of additional capital, consider what you might be able to actually get out of it as well as the cost of financing.
Another challenge is to figure out who is most likely to be able to help you and for the better rates and terms.
For my two cents, I recommend you work with a business financing specialist who can help you quickly determine what’s possible and where to apply so no time or money is wasted going through the process.