Equipment loans are borrowings undertaken to buy a specific piece of equipment. Equipment loans are among the most cost-effective financing vehicles. One potential downside is the amount the company must front since most equipment financing lenders will require the company to provide a down payment at around 20%.
Non-conventional real estate lenders, sometimes known as hard money lenders, will advance against certain types of real estate, but the difference with these lenders is that they look at the valuation differently. While we are all familiar with the “market value” of a property, that value assumes that there is a reasonable period to market and sell the property. Hard money lenders value the property based on what it will sell for in a short period of time; maybe as short as three (3) to six (6) months and they subsequently only advance 50% to 60% of that valuation. If the loan cannot be repaid, a quick foreclosure and sale follows to recover the loan. For certain situations where a borrower is asset rich but cash poor, it fills a gap.
Equipment and Real Estate FinancingEquipment financing is the use of a loan or lease to obtain hard assets such as production machinery, rolling stock, or computer and office equipment
Sales leaseback or sales and leaseback is another option as possible way to generate capital. This type of transaction is where the business or its shareholder is the owner of the real estate property where the business operates and owner sells the real estate to a buyer, and the business simultaneously enters into a long-term lease arrangement with the new owner. The cash received on the sale can be injected into the company for working capital. In the way the transaction functions as a loan, with payments taking the form of rent. There are potentially significant tax implications that are implicit in this type of financing related to the financing structure, term and payments.
Lease financing works as leasing capital assets conserves cash for working capital and allows for necessary investments in plant and equipment. The cost of a lease will be higher than bank financing but the savings in liquidity from the down payment the company did not have to make is likely to be more valuable in the near term.
There is also an active and secondary market players who will purchase a company’s unencumbered capital assets such as property, plant, and equipment and lease those assets back under a sale and leaseback transaction.
Depending on the nature of the equipment and its retained value on the used equipment ent loans as less risky
Whether by an initial lease or from a sale and leaseback transaction, leasing arrangements have a number of variations usually involving the disposition of the equipment at the conclusion of the lease term. With a Fair Market Value (FMV) lease, at the end of the lease term the company has the option to turn the equipment over to the lessor or to buy the equipment at fair market value. A $1 Buyout or Bargain Purchase lease is one where the company fully owns the equipment with the payment of the final dollar at the end of the lease. This is very similar to a loan arrangement aside from technical differences. A 10% Option lease is essentially the same as a Bargain Purchase lease but at the end of the term, the company has the option of purchasing the equipment for 10% of the original equipment cost. 10% Option type leases tend to carry lower monthly payments than the Bargain Purchase leases.
With all of these options – how do you make the right choice?It is without a doubt, a complicated choice and there is no one-size fits all or even a one-size fits most solution. Alternative financing strategies are both an art and a science to determine where your specific business belongs. Multiple factors go into this decision including your unique circumstances, your financial situation, leverage capacity you can support, your projected freed up cash flow to cover the debt service, your business size in both revenues and debt requirements, industry, location(s), understanding which lenders play in your space, and how much risk both the lender and you can take on. In your search for this type of funding, be prepared to provide several pieces of financial documentation including (but not limited to) prior financial statements, tax returns, cash flow projections, balance sheet forecast, an inventory of fixed assets, and future business plan.
Subordinated or Mezzanine Debt LendersSubordinated or Mezzanine Debt Lenders are similar to junior-secured lenders (reviewed below), except typically there is no collateral support, limited to no rights, and subordination to the secured lenders in terms of exercising rights, liquidation preference, and remedies. Oftentimes, as a result of the higher risk of their debt, Sub-Debt or Mezzanine providers will typically receive a much higher interest rate then bank financing and also pricing “kickers” such as warrants and success fees. This type of financing, through the warrants, normally provides the lender certain rights, which ong others, the right to convert to an equity interest in the borrowing business and increased management oversight and control. One thing to note – it is not uncommon for mezzanine lending to go hand-in-hand with an acquisition or buyout where the new owner(s) can be prioritized in a bankruptcy situation. With the high risk that comes with mezzanine debt financing comes also the potential for more generous returns than more standard corporate debt options. This lending scenario is most commonly seen with businesses looking for funding for a specific project, acquisition, expansion, or for a specific period in time.
