“Equipment as Collateral” – Not always as good as you think

By | February 10, 2014

Equipment As Collateral For LoanI was asked by a friend about equipment financing and collateral and such, and he remarked “well, your loan is secured by the equipment, right?” And I answered “sometimes”. Which then prompted an explanation (I’m a great conversationalist at the party, aren’t I?)

It is true that equipment financing can be similar to automobile financing in terms of the equipment being part of the collateral in the big picture. But only to a degree, and it also really depends on the equipment. Let me give you a few examples of equipment that isn’t great collateral:

  • Specialized equipment for specialized industries – This is probably one of the bigger issues with using equipment as collateral. If the equipment is even somewhat specialized, it can be tough to sell, as there’s just not a big market for it. For example, think about the machine that makes those little hard candies that come on a paper strip – you know what I mean, right (they’re right next to the wax bottles of colored liquid). Well, a machine does that, and it’s not a machine that every business can use. So if it has to be repossessed, the line of buyers might be small indeed. My sister (who loves that candy) might even pony up a few dollars for a used candy maker.

But it doesn’t even have to be a super-specialty piece of equipment. Even something like a large printing press might not be easy to sell these days.

  • Computers and other electronic equipment – No brainer here. Computer equipment ages like no other equipment. And almost any electronics aren’t far behind. How’s that monster 48” rear-projection TV doing? Call me on your flip phone and tell me, ok? If I don’t answer, hit up my pager.
  • Software – Again, no brainer. Especially software that’s named after a year (anyone buying Office 2010 these days?) Plus, you really can’t repossess software.
  • Vehicles – Surprising? Not really. Most vehicles lose value annually. Although after a huge drop when it leaves the lot (assuming a new vehicle here), the rate of depreciation is slower. Plus, it also depends heavily on the vehicle and industry. Some vehicles are easy to resell (you can always find a willing buyer for a dump truck), but some aren’t (not a huge demand for septic trucks).

These are just a few examples of equipment that doesn’t make great collateral in an equipment financing deal. Maybe next time I’ll explore things that make very good collateral.

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