By Jim Newman
7 Things You Need to Know When Lending on Machinery:
- Understand how fast the market can absorb the type of machinery being financed. Highly specialized equipment usually takes longer to liquidate than "standard" mainstream equipment. It is the job of the lender to understand this liquidation process and to make sure they are comfortable and that the projections are obtainable. Remember, the more comfortable the lender is, the more money the lender may choose to advance.
- Have a clear exit strategy. Have a clear understanding on how you will liquidate the machinery in the event of a default. The easier this process is, the easier it is for the lender to advance more money.
- Be flexible with the original collateral pool. In the event of third party leases, you must be willing to allow a small amount of the equipment to continue with its lease. Especially if there is excess equity in the lease and that equity is not needed to structure your deal. However, you should make sure to file a blanket lien on all the equipment in the event of liquidation. The equity in the leased equipment should "captured" for the benefit of the lender and the borrower.
- Always make sure you have a first position lien on the machinery. All the old liens must be cleaned up during the due diligence process in order to properly secure your investment.
- Always file a blanket lien on all assets in order to protect the guarantor of the loan. This prioritizes that the business assets are used first to pay off the lender before any personal assets are needed. When the borrower is also borrowing from another lender on its A/R and/or inventory, the two lenders must have an intercreditor agreement in place to spell out their respective positions on the assets.
- Prepare to be flexible during the term of the loan as the borrower's needs change. Lenders need to have a method to provide additional funding to borrowers who have kept current with their existing loan and need additional funds for additional equipment.
- Always trust your instincts! Lenders cannot document everything that is possible. We always depend on the integrity of the borrower as the relationship needs to be a win/win relationship.
Loeb Term Solutions is always looking to assist Lenders with hard to finance assets...We finance all types of businesses because we know asset values!
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