Equipment as Collateral for Credit

There are some fine points to valuing your equipment as security for a bank loan. But in any case, banks are more interested in your cash flow, your profitability, and your personal creditworthiness. November 11, 2005

We have about 750,000 replacement value in machinery and equipment. That's what it would cost to buy comparable equipment new. How much is that worth as collateral to a bank, and how much do I show on the books as an asset? Please don't tell me to ask my banker or an accountant this question, as there are many variables that they aren't all familiar with.

If I sold them today, they might not even bring $50k at auction. We all see how worthless equipment is today. That's why I'm wondering how to value it on the books and to secure a line of credit.

Forum Responses
(Business and Management Forum)
If you don't want to ask the accountant, then your stuff is probably worth $0.30 on the dollar to the bank. If you ask the accountant, he can explain how the banker sees things and help you prepare a financial statement that will ultimately be the basis for the banker's decision. Bankers recognize that depreciation is taken for tax and financial reasons and will typically add back the depreciation taken, less a factor for the age and condition of the equipment. In other words, your equipment may be worth much more than you think as a collateral asset. Then, maybe the stuff is only worth scrap, as you suggest. If you are looking for more than you could get on a credit card, the bank will want an appraisal.

If you have that much equipment, I would think you are pretty good size and would already have a working relationship with a good banker who knows your business.

Collateral is important, but not as important as cash flow (profitability) and credit. Cash flow is the ability to repay, and credit shows the willingness to repay. Collateral is only good when things go bad... therefore, bankers look at the very low side of value for equipment. But if the other two items are strong, then showing a banker your operation and having him meet with your accountant would be a good move. But if they are not good, then there is not much use in trying to sell him on the idea of taking the equipment as collateral.

I agree with the above. Bankers do not want your equipment. All they want is to know how and when they will get paid back. An accountant can help you prepare a balance sheet. This will show your equity (which actually matters more than your assets), but it will be your cash flow, credit history and your marketing plan that will secure the loan.

Banks look for a cash flow of 150K+ a year. Below this level, they will not lend money except as backed by your personal credit rating or will require 100% collateral with business or personal assets.