Many businesses have hidden capital in the form of equipment assets. The value of this equipment can run the gamut from a few thousand dollars to millions of dollars. If the actual value of the equipment exceeds the amount of the associated loans, there is equity in the equipment. That equity can be used to free up working capital, refinance existing debt, reduce monthly cash outlay or provide capital to fund business operations and expansion.
equipment refinance defined
Refinancing is the process by where the owner of an existing piece (or pieces) of equipment obtains a new loan, to consolidate or replace existing debt using that equipment as collateral for the loan.
In the case of an outstanding loan, the new lender issues a new loan, paying off the original lender thus creating a new loan obligation. This can result in reduced monthly payments and can also free up capital. Even if equipment is not subject to existing debt it can be used as collateral to support a loan to provide working capital to fund business operations. At times both reduced monthly payments and working capital can be achieved in one transaction.
reasons to refinance equipment
While refinancing takes a little effort, there are a variety of reasons why a company might consider a refinance.
- Reduce payments – depending on the amount of equity in the equipment and the amount of the loan, it’s often possible to lower monthly payments. This can be accomplished by extending the length of the loan terms.
- Obtain working capital (cash out) – if there is enough equity in the existing equipment, it might be possible to receive a loan that provides cash back to the owner. The cash can then be used to make other purchases or meet other obligations, such as paying off tax liens, outstanding lines of credit or MCA loans.
- Consolidate loans – if there are more than one outstanding loan, these can be combined into one loan, reducing the number of payments and reducing the number of payees. This can help streamline bookkeeping and accounts payable.
determine if refinance makes sense
The steps to determining if a refinance makes sense are:
- Estimate the amount of equity in the equipment, keeping in mind that the equity is calculated based on the actual value of the equipment not the “accounting” book value (purchase price less depreciation)
- Estimate, with a lender, the approximate monthly payment for a refinance
- Calculate the current monthly payments associated with the equipment debt to be refinanced
- Subtract the estimated monthly payment for the refinance (point 2) from currently monthly payments (point 3)
If the amount calculated in point 4 is a positive number, it’s most likely that refinancing the equipment makes sense, especially from a cash flow point of view. A seasoned and qualified lender can help the borrower assess equipment value, consider possible loan terms, calculate payments and review options to help the business meet its goals.
documentation needed to refinance equipment
To begin the refinance process, it’s important to provide a potential lender with a variety of information. This information allows them to understand the business needs, opportunities, challenges and goals and make recommendations in the best interest of the borrower. The information includes:
- Information about equipment and current debt obligations
- Description of the equipment to be refinanced – make, model, hours of service or mileage – allows the lender to determine actual value
- Debt schedule for loans being refinanced and/or debt obligations to be paid
- Current principle balances
- Monthly payments
- Business and financial information on the company
- Tax returns or financial statements
- Credit references and contact information
- Business narrative – to help the lender understand business history and future
- Signed credit authorization and company contact information
equipment and debt that can be refinanced
The type of equipment that can be refinanced most often depends on the lender and their expertise with and knowledge of the equipment. In CCG’s case, we finance a variety of revenue-generating equipment in the construction, manufacturing, transportation and waste industries.
For debt consolidation, the cash out from equipment refinancing can be used to pay off outstanding lines of credit, tax liens and even MCA loans.
In short, equipment refinancing can be used to achieve a variety of goals, including improving cash flow, consolidating debt and streamlining internal operations by having fewer loans and leases to account for. CCG can help you evaluate your current equipment fleet and debt servicing to determine if refinancing makes sense for your business.
Contact us now to see how refinancing can help you.