Equipment refinancing can be used to achieve a variety of goals, including improving cash flow, consolidating debt and streamlining internal operations.
By Kevin McGinn
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, and reduce monthly cash outlay or 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.
5 Benefits of Refinancing Your Equipment
Companies in the waste industry rely on capital intensive, revenue generating equipment and have a lot of equity tied up in that equipment. Refinancing the equipment can have major benefits to the cash flow and business operations of a company. Following are the top five reasons to refinance equipment.
#1: Lower Monthly Payments
Equipment refinancing can often result in lower monthly payments, thereby improving cash flow. This is most often achieved by extending the term of the existing loan and spreading payments over a longer period of time.
#2: Avoid Balloon Payments
Refinancing can be used to avoid an end-of-term balloon payment. Refinancing prior to a balloon payment pays off the original loan with a new loan and provides more manageable monthly payments.
#3: Exercise Purchase Options
Equipment leases have purchase options due at the end of the term of the initial lease. Many equipment lessors will not finance the purchase option despite the lessee making all of the payments as agreed. Refinancing used in this regard can effectively write a new loan using the leased equipment as collateral and the proceeds of this loan will pay off the residual. The end result being that the equipment is now owned and simply financed.
#4: Receive Cash
Machinery and equipment are capital assets, meaning they contain equity against which a lender may be willing to loan money. A knowledgeable lender that understands the equipment and its value can refinance equipment that is fully paid for or is currently being financed on another loan.
Using equipment that has equity on a loan can result in the borrower receiving working capital, from the proceeds of the loan. The cash can then be used for multiple reasons including:
• Make purchases—new equipment, raw materials, real estate, building improvements, etc.
• Pay off other loans or obligations—taxes, lines of credit, etc.
• Simply have a cash cushion for when it is needed
#5: Consolidate Debt
Debt consolidation simply means taking multiple loans and refinancing them into one loan with one monthly payment. In the case of equipment financing, the consolidation lender evaluates the equity in the equipment to determine the amount that can be refinanced and used to pay off existing loans.
If the loans being consolidated are all equipment loans, the lender combines the loans into one obligation, pays off the original lenders, and provides one loan with one monthly payment to the company.
If the loans being consolidated include equipment loans and other loans (merchant cash advance [MCA], other business loans, etc.), the lender will determine if there is enough equity in the equipment to provide cash from the loan proceeds to pay off the additional loan obligations. If there is enough equity, the loan amount will allow for cash proceeds that can be used to pay off the additional loans.
Debt consolidation is especially helpful if the loans being paid off have higher interest rates or unfavorable payment terms (in the case of an MCA) or balloon payments. It also simplifies bookkeeping by reducing the number of loan obligations and payments that need to be made.
Multiple Benefits are Possible
It is possible to achieve multiple benefits through equipment refinancing. One of the keys is to understand the amount of equity in the existing equipment. A lender that specializes in your industry and has equipment knowledge can help you leverage your equity in your equipment and enhance your borrowing power.
Determine if Refinance Makes Sense
The steps to determining if a refinance makes sense are:
1. 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)
2. Estimate, with a lender, the approximate monthly payment for a refinance
3. Calculate the current monthly payments associated with the equipment debt to be refinanced
4. 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 is 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 is 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:
1. Equipment and current debt obligations
a. Description of the equipment to be refinanced—make, model, hours of service or mileage—allows the lender to determine actual value
b. Debt schedule for loans being refinanced and/or debt obligations to be paid
i. Current principal balances
ii. Monthly payments
2. Business and financial information on the company
a. Tax returns or financial statements
b. Credit references and contact information
c. Business narrative—to help the lender understand business history and future
3. 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. Some banks and other lending institutions may offer equipment loans for new equipment, but stay away from used equipment or refinancing.
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. If you believe you could benefit from equipment refinancing, contact your lender. | WA
Kevin McGinn is Senior VP of Commercial Credit Group Inc. He helped co-found the company in 2004 and heads up the
national waste equipment financing division. He has worked in equipment financing for nearly 30 years and brings decades of equipment knowledge and industry expertise to his customers. Kevin can be reached at (704) 731-0031 or e-mail [email protected].
This article first appeared as blog posts, written by Commercial Credit Group Inc.: