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The Reality of Equipment As Security

We are sometimes asked why a lender seems to want more in security for your equipment lease than what your equipment is worth. Have you ever wondered why they want you to co-sign if they already have the equipment as security?

While an equipment lease for qualified companies is typically structured with the security of the equipment itself (and first/last payments in advance), other companies may find the lender is asking for additional security. Examples of this may be a larger first/down payment or the co-signing of one or more of the owners.

What It Means For the Funder

While we all love our equipment, the reality of thinking it “should be enough security” is not always that clear-cut for the funder. Consider what is involved for them if something goes horribly wrong for your business and the funder ends up having to realize on the lease (repossess the equipment):

  • Detaching/disassembling of the equipment
  • Shipping of the equipment to someone who will sell it (typically an auction house or to a vendor of that type of equipment)
  • Repairs or refurbishing for resale
  • Commission on getting the equipment sold
  • Legal fees
  • Bailiff fees
  • Costs for staff time involved in the whole process (which can take weeks)

Keep in mind that, along with all of the above costs, the equipment is a depreciating asset. Just as with a car, as soon as you “drive it off the lot”, it’s depreciating. Even if the funder didn’t have all of the above expenses and was able to resell the equipment immediately, they would not be able to sell it for the full amount they invested into it. So we can add to that list:

  • Depreciation

When someone defaults on their lease contract and the funder must repossess that equipment, understand that they haven’t necessarily been “paid back” and they won’t necessarily “break even” on that business deal.

 

So, if you are facing additional requests when dealing on an equipment lease, keep the following in mind: The equipment will be making you money to pay for itself, the lease will likely have tax advantages, and you are not having to sell part of your company to acquire the equipment.  When the lease is over, the funder goes away, and you now own the equipment and your company.

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