Understanding Heavy Equipment Collateral Loans

Last Update: February 10, 2021 Loans

Every large, growing industry relies heavily on capitalization. How well a business is capitalized could spell success or long term sustainability. After all, capitalization dictates what you’ll be able to work with (i.e., structures, equipment, and other assets). A poorly invested business will not operate on a larger scale, buffer against losses, expand, and other things that obviously require lots of money.

And unless you’re a business tycoon who already has a lot of capital to finance a new business, you’re most likely not going to be able to capitalize on large businesses on your own. The only other way to get capital is through a loan. But since you’re going for a large amount of money, it’s impossible to find a financial institution that will lend you large amounts of cash for your business. Take note that this is the case even for borrowers with excellent credit standing.

This is where heavy equipment collateral comes in. Even with bad credit, business owners can use their equipment to secure loans and pay them back after earning from the business operations they could pursue. When many lenders have become stricter with entertaining applications from businesses that require large capital, this recourse has become a very viable and practical solution for many borrowers.

What Exactly is a Heavy Equipment Collateral Loan?

As the name suggests, it’s a loan that uses heavy equipment as a form of security. Because lenders won’t always trust anyone who goes to them for a loan, the borrower needs to present something to show them that they’re willing and able to pay back their debts as agreed. Think of it as a mortgage like homeowners do get with their homes or cars when they need to borrow large amounts of money. Only this time, businesses need to capitalize, and they’re using equipment used in the industry instead of their personal belongings.

Typically, financial institutions and banks resort to credit ratings and other personal information relating to the borrower to assess whether they can pay the loan. But not everyone has a good credit background. Thankfully, the use of collateral heavily outweighs most of the information on credit background. And with the collateral, lenders will be more willing to lend cash, knowing that they can foreclose upon something with value to get back the money they lent if the borrower won’t be able to pay in the end.

Meanwhile, borrowers get the money that they badly need for capitalizing their business operations. In this case, industrial and commercial businesses can continue with their operations and expansion and then profit to pay back their loans over time. And as they continue, they can further make loans as needed, using their equipment as collateral again.

On the other hand, the lenders continue to profit off interest rates, and they’re more or less sure that the debts will be eventually paid back. This results in a healthy credit relationship between the borrower and the lender.

What Type of Businesses Benefit from Heavy Equipment Collateral Loans?

Because of the term “heavy equipment,” the first thing that comes to mind are construction companies. This is true because the construction industry needs lots of capital to start a construction project. And because time is of the essence in construction work, capital needs to be acquired in large amounts within short periods of time. They’ll need the money for materials, equipment, and funding for workers, among other things.

But construction firms are not the only industries that can take advantage of heavy equipment collateral loans. Pretty much any business that makes use of large equipment to operate can do this. The mere fact that they use this kind of equipment shows the high amounts of capital is needed to get the business to work.

Farmers and other workers in the agricultural industry, for instance, will need capitalization for their farmlands, farmhands, and livestock. They can use their tractors, hay grinders, tillers, and other farm equipment to facilitate the loan.

Manufacturers and factory owners can likewise acquire funding by putting up their factory equipment as collateral. These include any machinery that’s needed to operate the business.

Printing presses can also use their different machines for producing their publication as collateral for any loans they need. This is because large printing machines can also be considered heavy equipment, depending on the machine’s kind.

Any commercial business that relies on large vehicles for delivery and transport can put them up as collateral for loans. Large delivery trucks, cargo trucks, and other large vehicles have been good collateral for loans.

Mining, excavation, and digging industries can also benefit from heavy equipment collateral loans. The same goes for operators of all kinds of drilling, paving, bulldozing projects, and those working underground like those in the business of sewage maintenance and other underground utilities.

In some cases, players in the medical industry can also use their medical equipment as collateral. It’s not a common thing, but it can be done with medical equipment as well.

The equipment that a lender will accept is listed as equipment and those that fall within a minimum auction value. Lenders will often make a list of the different types of equipment they’re willing to take as collateral from particular industries.

Alternatively, they can choose to take the equipment that’s of a minimum auction value. This refers to the minimum bid value that a piece of equipment should be auctioned out for if it is foreclosed and sold to the public to pay for the unpaid loans. Auction values are different from the retail value (the amount a piece of equipment is sold on the market), and the former is usually of smaller importance than the latter. Thus, they have different means of computing this value, such as comparing the auction value of the same kind of equipment used as collateral in the six previous auctions.

Why is Heavy Equipment Good Collateral?

Not all things can be considered as viable collateral to a loan. Although these items have to be of great value (i.e., stocks, deposits, vehicles, homes, etc.), the fact that they are valuable doesn’t make them good collateral automatically. Generally, two main questions are asked of an object subject to be used against a loan:

  • Is the object valued easily? Some items fluctuate in value in market price or are only difficult to appreciate by their nature. For example, although assumed to be very valuable, goodwill and intellectual property are difficult to tag a price with because they are affected by many factors and use multiple valuation techniques.
  • Is the object easy to liquidate? Things that are of high value don’t always cut because they can be hard to convert into cash. This is affected by many factors, including quality, scalability, and the object’s available market. For example, novelty items like collector’s items are not always ideal collateral because, although they are very valuable, there aren’t very many people who will want to buy them.

These two basic questions to determine an object’s viability as collateral stem from the security’s very purpose. That is, to have them auctioned off and have the proceeds used to pay the unpaid balance of your debts. Lenders will be more interested in granting loans if the collateral involved has a fixed value and can be sold quickly.

What makes heavy equipment so easy to value is that it is sold at more or less a fixed price on the market. Their market values don’t change so quickly. And even if they are subject to depreciation, there’s a single, easy to use a formula that determines the equipment’s current cash value. Furthermore, these equipment, brand new or second hand, are often useful to other industries, so long as they are still in good conditions. Although some specialized equipment is harder to reuse, most equipment used as collateral can be sold in auctions.

What Makes Equipment Loans so Great?

There are a lot of advantages that come with setting up your equipment as collateral for loans.

  • It’s quick and easy. While most financial institutions vary in the procedure, they generally have three main steps: application, approval, and funding. First, you apply. Second, the lender will assess your application and approve it. Third, they will send the money to your designated bank account. Getting equipment loans is as easy as one, two, and three!
  • You won’t need much documentation. Typical business loans will require a substantial amount of documentation to prove that you’re capable of paying back the loan. They do this so they can make sure that they’re working with someone they can trust. Depending on what they ask for and how much you’re asking from them, the level of complexity and volume of documents required will vary. But putting up a piece of heavy equipment as collateral can quickly put lenders at ease since they have something to secure your loan. As a result, they don’t ask for much paperwork anymore.
  • You get flexible payment plans. Lenders will usually be more accommodating of your financial needs and will agree to terms that will allow you to maximize cash flow. You can, for instance, choose whether you pay monthly, quarterly, or annually. They can also agree to defer payment of costs for a period of time to help you collect the amount needed through business.
  • You will get a response almost immediately. Financial institutions that engage in equipment loans know that their clients are in businesses where time is of the essence. As such, they make it a point to process loans as soon as possible to save you time and, possibly, money at a time when you need it the most.
  • You save on taxes. Depending on your situation, you can account for these loans’ cost as part of business expenses, deductible from business taxes. Note: Make sure you consult your accountant on this matter as the rules for this benefit will vary between states.

What are Some Drawbacks to This Type of Loan?

The overall benefit you get from using equipment for loans is that you get the loan immediately. But there are some side-effects to this.

For instance, the equipment you used to collateral could be heavily subject to depreciation. This means that you don’t have as much value on the equipment as you had when you initially put it up against the loan in case of default. When this happens, you will owe the lender the difference of the value as per the depreciation.

You will also need to invest in insurance and other maintenance costs to keep your equipment in good condition. Losing your collateral will complicate what otherwise would be a simple loan.

However, your goal is to ensure the benefits outweigh the costs when assessing the pros and cons. If you’re looking for a quick source of capital for your business with little to no complications, using equipment as collateral is definitely the way to go, and the concerns of depreciation and maintenance won’t be too much of a problem.

What about Bad Credit?

As mentioned earlier, those who engage in equipment loans don’t really care much about credit history. This is one of the main reasons why applying for this sort of loan doesn’t require too much paperwork – the collateral is more or less the security they need. So the good news is that having bad credit doesn’t affect your qualifications as a borrower in heavy equipment loans.

But here’s even better news: engaging in heavy equipment contracts can actually help you build good credit! One of the main reasons people with bad credit history have difficulty letting up is that not many banks or lending institutions deal with them. And even when they do, they’re heavily deterred by high-interest rates. When loaning with heavy equipment as collateral, your bad credit ratings aren’t given much weight, and you are given a chance to participate in a loan you can payback.

Aside from the three-step process that makes sure that you’re capable of paying the loan, these arrangements are worked to your advantage as well. You’re able to pay at the interval you want (quarterly, monthly, etc.), so you’re more able to stick to what was agreed upon. These loans that you’re able to pay off will eventually go to your credit history and help you build good credit again.

Can Heavy Equipment Collateral Loans Help Me Upgrade Equipment?

Yes, it can! Financing institutions can help finance your new equipment, making it the perfect solution for those who don’t have enough cash to pay for upgrades out of their own pocket. In these instances, you’ll be paying only a portion (usually half) of the brand new equipment’s actual cost while you loan the rest from the lender. The amount lent is then secured by the brand new equipment you just acquired. This is an arrangement similar to most car loans, where the vehicle itself is the security for the loan.

Like other heavy equipment loans, these are perfect for those who need to have those immediate upgrades. The downside, however, happens when the loan term is too long. Your new equipment depreciates over time, and if you’ve still not fully paid the balance, you’ll be paying for the equipment even after it’s already obsolete! Otherwise, financing your equipment upgrades is a good option, so your business never slows down even when you lack the cash for capitalization.

How Much Collateral is Enough?

Simply put, it depends on how much you need. But one rule of thumb is that you will never get 100% of the heavy equipment’s fair market value in cash. For example, when your tractor is worth $50,000, no lender will agree to lend you $50,000 in cash.

For most lenders, they’ll usually follow a ratio of 1:2 between the value of the collateral and the amount that can be loaned. In the example above, the $50,000 tractor could net you a $25,000 loan. Of course, the actual value will vary, but the bottom line is that you’ll never get 100% of the collateral’s value. In case you need more cash, you can add another piece of heavy equipment as collateral.

Some Helpful Tips when Using Heavy Equipment as Collateral

  • Always keep a detailed inventory of your assets

This should be pretty basic for any business, but a lot of businesses take this for granted. Or when they keep an inventory, they forget to keep track of each asset’s value, which is the most important piece of information as far as using assets as collateral is concerned.

It’s not very complicated, actually. You have to list everything down in a spreadsheet. Make sure to cover both acquisition costs and fair market values, with emphasis on the latter.

This does a lot of things. First, a complete record will show your lenders that you’re paying attention to detail – which is a good way to make an impression when they want to review your documents. Second, knowing your assets’ value will help you decide which piece of equipment is the best collateral for a particular loan. Third, getting an appraiser to evaluate your assets will save you the hassle of getting your assets appraised later when you need it the most. After all, time is of the essence when capitalizing on businesses like these.

  • Choose which assets to set as collateral wisely

There are many reasons for this. First, not all financial institutions will equally accept the same kind of equipment as collateral (look at what they’re willing to buy and their minimum auction value requirements). Second, you don’t want to “over secure” your loans with equipment that is too valuable than the actual loan since you can use those for bigger loans in the future.

Note that loans secured by heavy equipment don’t have to be purely tied with such. You can opt to go for other types of collateral as well, such as receivables, cash deposits, and other real property.

  • Be fully aware of the risks of the action

Like all business decisions, there are risks to putting up property against a loan. Ask your financial analyst or advisor, and then ask yourself whether the foreseen benefits outweigh the possible danger. It’s not all the time that you have to make a loan for your business.

  • Discuss

While lending firms will try to put up a front of strictness to rules of their company, they’re still open to compromise. Try to haggle for more favorable rates and make the most of your heavy equipment collateral value whenever you can. The good thing about this habit is that there are absolutely no risks to it. The worst thing that could happen is that the lender will insist on company policy. So it’s always important to give it a shot. And when doing so, make it a point to tell them about your situation – they might be willing to help you out.

  • Always remember the period of the loan

Try to match your loan with the lifespan of the equipment used as collateral. For example, if the machine you’re putting up as security will last for five more years, try to get a loan with a five-year term. A period that’s too short will cause you to make payments faster. Have one that’s too long, and you’ll be making payments even after the machine has become obsolete.