Recapitalizing Equipment

“Things To Consider When Recapitalizing
Your Existing Equipment”

One of the ways that business owners and managers access incremental capital for business operations is through the refinancing or recapitalization of equipment that is owned outright by the company or nearly owned outright with significant equity in the assets to leverage.

We call this refinancing because in most cases the equipment was previously financed and since been paid off. For longer use types of equipment, there can still be an opportunity to refinance the assets a second time around in order to inject capital back into the business.

While this practice does work and in theory sounds reasonable to most, there are some things to consider when crunching the numbers.

First of all, there can be considerable variability among sources of equipment financing in terms of the amount they will consider for an equipment refinancing application.  The range can be from 85% of Orderly Liquidation Value to 60% of forced liquidation value of the owned equipment.

So if you think the orderly liquidation value of your assets is $1,000,000, the forced liquidation value may only be $750,000, which can make quite a different in the amount of funding that can be made available, depending on what you can qualify for with a lender you're applying to.

Second, the cost of financing that is available can also have a large range, going from Prime plus one or two on the low end to prime plus nine or ten on the high end. The higher cost of financing is not in itself unreasonable and can be explained in terms of risk to the lender, but it still needs to be factored in to the cost of financing you can expect.

In situations where the business is in financial distress, the cost of financing will be even higher, likely falling somewhere in the 18% to 24% per annum range.

Third, these transactions may be done as a new equipment loans, but many will need to be done through a sale and lease back transaction where by the financing or equipment leasing company purchases the assets from the business and provides an equipment lease back in return for a defined period of time. The sale and lease back transaction can potentially trigger income tax effects due to the fact that the assets are being sold, so this also should be factored into the transaction.

Fourth, the process, especially for the lower cost sources of equipment refinancing, is going to take some time. Third party appraisals are typically required as well as background searches on the assets to make sure a clear title is available to the financing company. The entire process from application to funding can take 30 to 60 days to complete. Faster money is typically going to be more expensive money, so its important to plan ahead and not leave this financing option to the last minute.

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