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Expand business with equity from capital assets?

Johnc

Member
Joined
Jan 15, 2011
Messages
15
Location
Toronto
does anyone know articles or other literature relating to purchasing equipment with equity already invested in paid off equipment. Is it possible to utilize two pieces with only having to fully purchase one or use what already been invested?
 

Monte1255

Senior Member
Joined
May 6, 2008
Messages
317
Location
Minnesota USA
Occupation
Farming/forestry/TSI
are you thinking in terms of using the equity side of your balance sheet to borrow for a second machine? If so, for myself, I guess my preference is to secure loans with the machine it's self and not put any kind of lean on any other equipment if possible. I hope I understood you correctly here.
 

OzDozer

Senior Member
Joined
Jan 18, 2007
Messages
2,207
Location
Perth, Western Australia.
Occupation
Semi-Retired ..
John - I don't know of any articles that discuss this style of financing that you're discussing. The reason being that financiers all tend to specialise in different areas of financing.
Most financiers, when financing used or new items of equipment, require either additional security in the form of freehold vacant land, or freehold land and buildings.

Some financiers - but only a very select few - will accept machinery or vehicles as additional security for lending. However, the very largest majority of lenders (probably 98%) regard "depreciating assets" (i.e. - machinery and vehicles), as having little commercial value, because their value is easily affected by their mechanical condition, and market conditions.
Land and buildings are assets recognised by financiers as having solid value - even if property values do fluctuate.

In general, if you own one item of equipment outright, and attempt to use your capital equity in that item as additional security for financing another item of equipment, a financier will discount that equity to nil value.
The financier will usually demand additional "hard assets" in the form of land or buildings as additional required security. In fact, many financiers are intent on acquiring a hold on vastly more security value than is needed for the deal being considered.
This is a standard technique amongst financiers - because once they have an additional, say, $200K in security to securitise say, a $50K loan - then the extra $150K goes on their books as a company "asset".

In other words, they are using the borrowers assets to boost their own lending ability. This gain in company "asset backing" often enables the financier to provide unsecured finance to other borrowers - at high interest rates, of course.

Any financier who might be prepared to accept equity in an item of equipment, to advance loan monies, will almost certainly discount the equity value to a very low figure, and charge high interest rates accordingly.
The more solid security you can offer for loans, the lower your interest rate charges will be - and the more that a wider range of financiers will consider your deal.
 

Swamp rat

Well-Known Member
Joined
Apr 16, 2009
Messages
114
Location
La / Ga
As you asked - it can be done , but not very often. I had to accept or buy out my partner a year and half ago and some of the equipment was done as you asked and the rest was loaned on the equipment value plus putting up a cash cd.
I think a lot of the decision is based also of your past history as well as past history with the lender , i also had to give a years advance portfolio of booked work and job values as well. They do it but its limited basis and a lot of hoops to jump thru. If possible use the equipment value as the backing and keep any clear equipment out of the picture , never know the future.

Hope this helps.
 

Business Banker

New Member
Joined
Feb 12, 2013
Messages
2
Location
San Diego, CA
As others said it is definitely possible. Capital equipment is usually discounted to 50% when used as collateral for lending purposes. If you own multiple machines it should not be hard to facilitate your request. Obviously other variables that will factor into the approval process will be your credit and cash flow of the business. Most lenders will use a global cash flow factoring in your business and personal income and debt. My clients that want more advantageous rates will use collateral to get the best rate available. When there is no collateral involved and no A/R's available the rates will be higher and the loan will need to go through equipment financing. Message me if you want more info.
 
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