Equipment collateral loans (ECLs) are loans obtained against the value of items in the borrower’s possession. The equipment is used as collateral, pledged against the loan.
What are Equipment Collateral Loans?
ECLs are secured loans, meaning that if they cannot be repaid, then the bank or loan company has the right to sell or take the equipment in order to generate payment. Equipment is appraised for its liquidation or auction value, and sums loaned are usually a percentage of that.
The auction value is closer to the retail value on used goods rather than on new items. New equipment devalues the minute it leaves the showroom – much like new cars. If you are looking for funds in order to purchase equipment with, then the equipment that you buy can be used as collateral against the loan which paid for it. Lots of different kinds of companies offer this kind of financing, from banks to credit unions.
Eligibility for Equipment Collateral Loans
If you have valuable equipment, then you probably have access to asset-based lending. Qualification requirements will depend on the loan provider you are dealing with, but some lenders will expect you to own at least 20% of your business and documentation required will probably include tax and social security information, as well as business details (location, date established, turnover etc.)
Ideally the equipment is owned free and clear, solely by you, but if not, then detailed information about ownership and any invested parties will be required. You will not need to have perfect credit in order to access loans of this kind, but poor credit may increase the cost of borrowing.
Some lenders require you to have been in business for at least two years, while others are happy to offer loans for start-up companies. Good documentation attesting to the value of the equipment will help you to get the best value – this may be maintenance reports or even a formal valuation. Various types of machinery are eligible, including:
- Agricultural equipment
- Aviation equipment
- Heavy machinery and factory equipment.
- Oil and gas equipment
- Office equipment
- Precision tools
- Printing equipment
- Restaurant equipment
There are many different kinds of funding available for small businesses. Peer to peer lending may be an option, as might unsecured loans, invoice factoring, or card transaction accounts receivable. Inventory can also be used as loan collateral.
Pros and Cons of Equipment Collateral Loans
ECLs are often quick to arrange and do not require extensive paperwork or a perfect credit history. They are often a vital resource for small and medium sized enterprises. Unfortunately this convenience comes at a price.
Pros of Equipment Collateral Loans
A lot of equipment collateral loans are individually reviewed, so there is usually some opportunity for negotiation. Repayment terms may be flexible, or adjusted to suit seasonal operations. ECLs are an excellent source of liquid capital for small businesses – particularly as more traditional doorways to credit may be closed to them. Some of these arrangements qualify as tax deductible.
Possible Disadvantages of Equipment Collateral Loans
Business owners need to be very pragmatic about equipment that is put up as collateral. At the very least, theorizing about a worst-case scenario is important, such as what would happen if it were not possible to repay the loan and the equipment were taken by the lender. If that would put you out of business, then it might not be worth the risk. A limited liability company may not be suitable for this kind of lending.
Top Suppliers of Equipment Collateral Loans
Suppliers of ECLs should have a good reputation among their clients facilitated by good customer service, excellent reporting and clear contracts. It is also highly beneficial if they understand how to structure the arrangement so that it is Section 179 qualified, generating tax write-offs that may cancel out the cost of borrowing, or more.
Some of the best providers include:
- Finance Heavy Equipment - specialist
- Marlin Equipment Finance
- American Capital Group
- Viking Equipment Finance
Smartbiz has focused on the low value end of the market – lending small amounts to lots of different companies. Unlike most of the lenders in the market, Smartbiz has partially automated the client evaluation procedure. This makes it very quick and simple to access funds. This lender will consider various kinds of collateral for the larger loans.
Finance Heavy Equipment - specialist
This company specializes in lending against heavy construction equipment. This company offers financing and refinancing options. Although each decision is individually assessed, turnaround is very fast: a decision within 24 – 48 hours, and funds in place within ten days.
Marlin Equipment Finance
Marlin Equipment Finance has a subsidiary The Marlin Business Bank – together they have generated over 4 billion dollars for small businesses since 1997. It also has several leasing arrangements available.
American Capital Group
American Capital Group has over 20 years of experience in the field and backs businesses of all sizes. This has given them expertise in many different sectors, including taking on the risk of lending to new businesses. They tend to back purchases of new equipment rather than existing machinery.
Viking Equipment Finance
Viking are happy to take on equipment that is already in use, however, borrowing levels start at $1m plus. They will advance 75 – 80% of ‘forced liquidation value’, and also offer short-term bridge financing options.