Equipment Appraisal Blog | Understanding Machinery Appraisals

As many are witnessing significant increases in residential and commercial real estate market prices and rental rates, due to the economic issues facing the country, the used machinery & equipment sales have experienced similar price adjustments. While appraisers and resellers can research and support these inflated prices based on actual sales, many banks and financial services companies are taking a more conservative approach when it comes to lending practices.

Still stinging from prior market “bubbles” which ultimately popped and led to significant defaults and write-offs in past decades, these equipment and real property borrowing sources are taking a more conservative approach when approving loans and investments using these assets as collateral.

Even before this most recent wave of used property value spikes, lenders would typically approve based on 60-80% of fair market value or 80-100% of an orderly type of liquidation value. This was considered normal business practice and for the most part, continues today. The biggest change we are seeing now is they are not taking every appraisal at face value with an understanding that current market conditions are in certain cases, unprecedented, with price increases at a dramatically high level.

Lending institutions are looking back at previous market levels for similar properties and equipment, and attempting to support a more reasonable value that will hold up over the long term. The biggest concern to owners and buyers looking to borrow or refinance is the lower level of funds approved, requiring a larger out-of-pocket cash down payment on the assets.

It is prudent to keep this information in mind as you look to acquire used machinery & equipment over the next year. While you may have no choice about the price you’re paying for these assets, the lending markets are becoming savvier in their approval practices, which will require more flexibility when settling up with sellers. If possible, try to keep an extra amount of cash on hand available to fill in the gaps.

Whether you work at a conventional bank, leasing company, investment house, or private equity firm, there are several options when it comes to mitigating the risk involved with short and long-term lending. The phrase "collateral" can mean any number of different types of assets that the targeted business has available to pledge as security in a transaction. Depending on the type of company doing the lending or investing, they will identify and independently value the collateral as part of the deal structure.

The following assets are considered the most common collateral:

Tangible Asset Types:

Real Property - Buildings, land, improvements, and certain fixtures

Machinery & Equipment - Typically applied to commercial and industrial business-owned assets. Common examples are construction equipment, trucks, trailers, and machine shops.

Personal Property - Typically identified for individuals and residential properties. Common examples are cash, furniture, household goods, jewelry, and artwork.

Intangible Asset Types: Stocks, bonds, business goodwill, patents, trademarks, customer lists/relationships, established websites, domain names, intellectual property, and trademarks.

From the perspective of conventional banks and leasing companies, tangible assets drive the collateral value assessment when working with businesses or individuals that own a significant amount of real estate and equipment. These organizations understand the overall company value is significantly higher than the sum of the tangible property, however, the ability to “touch and feel” the assets which secure their investment loans and leases brings a higher comfort level.

They are generally in for the long haul with their clients, sticking with them for several years while looking to provide competitive interest rates.

Investment houses, private equity firms, and similar institutions typically take a shorter-term look at the business which creates an opportunity to consider intangible as well as tangible assets when approving and collateralizing transactions. Simply put, overall business value, which combines every asset type into the appraisal equation, is a useful tool for these investors to assess their risk level.

This strategy is logical given the low probability that a significant change in the business will occur when viewing it from a 12-24 month perspective vs. the longer-term bank and leasing company directives.

In summary, collateral is a key component of virtually every investment transaction in the marketplace. Determining the types of assets which will secure these deals depends on the risk profile each company puts into practice. When considering utilizing these types of financial institutions and investment firms, ensure you understand these factors before committing to a business partner.

When you're trying to secure a business loan, many financial institutions require bank financing collateral. One option you have available to secure the financing you need is by offering your equipment as collateral. However, how do you document the value of your equipment? The best way is through an equipment appraisal. Here are some details about how it works.

How an Equipment Appraisal Helps You Document Bank Financing Collateral

When you're using your equipment as collateral in a bank loan, it's important that both you and the bank agree on how much it's worth. If the bank undervalues your equipment, it may tie up more equipment than is fair in your loan. If you default on that loan, you may lose more machinery that would be reasonably required to cover the loan. If you overvalue your equipment, you may feel that the bank is taking advantage of the situation when they're being reasonable about the situation.

But how do you and the financing company reach an agreement on how much the equipment is worth? Do you use average resale values in the area? What if the industry in your region is depressed, causing equipment values to be driven down? Do you settle for low equipment values when you've maintained your equipment in excellent condition over the years? Do you hope the bank doesn't notice the poor condition of that one or two pieces of equipment or that they never need to call in the loan and realize the problem? An equipment appraisal helps you avoid this issue by preparing a solid report on the calculated value.

But when you have an appraisal report prepared by a certified equipment appraiser, you get much more than a report that satisfies everyone in regards to your equipment values. Is this round of financing just the first step in a larger expansion? What if your equipment fails before you get to that point? When should you replace the equipment as part of the entire process? An appraisal report will look at the condition of the equipment. Because an equipment appraiser spends significant time studying equipment on a regular basis, they have a good feel for how long the equipment is expected to last, providing you with an estimate of the estimated useful lifespan. This allows you to plan for equipment replacement as part of your larger expansion or upgrades.

What if you have a fire, vandalism or theft of your equipment? If the amount of collateral and the insurance settlement don't match up, you may find yourself having problems down the road. When you use a certified equipment appraiser, the report they provide is developed using standardized appraisal methodologies. These calculations have been tested in court, by insurance companies, by tax agencies and in financial circles, so they stand up well to heavy scrutiny. This means they'll work well for both securing the financing you need as well as providing reliable documentation of your equipment's value for other purposes.

When you get an equipment appraisal to document your bank financing collateral values, you can prove what your machinery is actually worth. However, to ensure that your appraisal is accepted at face value, you'll want to be sure that you use a certified equipment appraiser. Why? The process of becoming certified ensures that the appraiser is using standardized methodologies that will stand up well to scrutiny in legal, financial and insurance circles.

Understanding orderly liquidation value in your equipment is just something most business owners never consider. Why? In general, liquidation is considered by most business owners to be a sign of failure, such as a bankruptcy liquidation. But there are a number of circumstances in which you may need to have an equipment appraiser perform a liquidation machinery valuation that have nothing to do with financial trouble in your business. In this post, we'll take a look at which circumstances may call for orderly liquidation equipment values and why this type of appraisal is used in those situations.

How businesses work: understanding orderly liquidation value in your equipment

What is orderly liquidation value?

Orderly liquidation value falls between forced liquidation value and fair market value in terms of monetary compensation. It's calculated under the assumption that the piece of equipment or machinery must be sold, but that there is a longer period of time to do so, such as a few months. You would receive less than you would at fair market value, but receive more than you would under a forced liquidation.

How is it different than fair market value?

Fair market value assumes that the equipment would fall under normal exposure in the market place before being sold for what is perceived as a fair price to both the buyer and seller. There's no serious time limit on how long the equipment would be offered for sale, so it would be sold for a higher price than in an orderly liquidation scenario.

How can orderly liquidation equipment values impact my business?

When you're getting ready to sell a business, knowing the orderly liquidation values allows you to gain quick cash to help with financing or to provide an additional buffer during the sale process if things don't go as smoothly as you'd like. When you're purchasing a business, knowing these values allows you to relatively quickly sell some of the excess equipment to pay down debts or meet other needs during the process. 

In what kind of situations is orderly liquidation value used?

In many circumstances, people involved in a business need to receive money relatively quickly for a number of reasons, but are willing to wait a reasonable amount of time to ensure they're getting more from the sale of that asset than they would through a forced liquidation. This can include the breakup of a partnership, the dissolution of a marriage where both individuals were involved in the business, the sale of excess equipment in anticipation of closing a business sale, an unexpected death of a business partner or similar scenarios. By providing additional time, the party that is leaving the business or their heirs will then receive money for the equipment that is sold without having to either lose out on the machine's value through a quick sale or wait a long period of time for it to sell using conventional methods and fair market value.  Banks also often lend based on Orderly Liquidation Value.

As you can see, there are many different situations where understanding orderly liquidation value in your equipment is important to your bottom line. When you need equipment appraisals, it's important to work with an equipment appraiser who is certified, because the certification training process ensures they know which standardized methodologies to use in which situations. Why is that important? Standardized methodologies are developed to stand up to strong scrutiny, including legal, insurance, financial and tax circles. Getting a quality equipment appraisal is vital to your bottom line.

When you're expanding or improving your business, it's important to understand the terms of your financing agreement. With changes in the banking industry since the 2008 recession and bailouts, many businesses are looking at bank financing collateral as a possible option to consider. But how does it really work and will it cause problems down the road for your company? In this post, we'll take a solid look at how equipment appraisals should be a part of your toolkit when approaching bank financing involving collateral.

How does Bank Financing Collateral Really Work?

Banks require collateral as an insurance policy, so that they can regain any losses from a loan default by selling the collateral to make up the balance due. Though immovable assets are typically thought of as assets such as real estate, large equipment that is difficult to remove may also be considered this type of asset. Smaller pieces of equipment or equipment that is more easily moved is considered a movable asset. The bank may require that you provide a high amount or all of these assets as collateral to secure a loan. But at the same time, you don't want to risk any more of your equipment, often the very source of your income, than is absolutely necessary. What can you do to both protect your interests in your business while providing the bank with the financing it needs? One possibility is through an equipment appraisal.

Equipment appraisals are reports prepared that calculate the value of a piece or a lot of machinery. If they're prepared by a certified equipment appraiser, the report will stand up to much higher levels of scrutiny than a report or general quote developed by a dealership or other party. Why? Because a certified appraiser is taught specific, standardized methodologies to calculate the machine's value, a report prepared by them is considered more accurate and reliable than other methods of determining equipment value. These methodologies have been scrutinized in legal proceedings, financial circles, insurance claims and tax agencies and have evolved into a nationally-recognized set of standards - the Uniform Standards of Professional Appraisal Practice (USPAP). 

When you have an accurate valuation performed, you have a solid figure you can take to the bank when negotiating the terms of your financing. Because the report has been provided by a certified appraiser, the bank officers know that it's an accurate representation of your equipment's worth. That means that you can choose which piece of equipment you're willing to put into the agreement as collateral and which ones to protect from risk.  An accredited appraiser through organizations like the American Society of Appraisers (ASA) with the Machinery & Technical Specialties (MTS) designation must provide unbiased appraisal reports that all parties can rely on.

As you can see, using machinery valuation as part of your process for agreeing to bank financing collateral requirements can help ensure that you're only putting as much of your business assets as are necessary. Using a certified equipment appraiser helps ensure that not only are you getting accurate equipment values, but that the valuation report with stand up to strict scrutiny by your financial institution.