How do you determine collateral requirements for capital equipment financing?

1 Type of equipment

The type of equipment you want to finance affects the collateral requirements. Generally, the more specialized, durable, and resaleable the equipment is, the more likely it is to serve as its own collateral. For example, a tractor, a crane, or a medical device may have higher collateral value than a computer, a printer, or a furniture. However, some lenders or lessors may still ask for additional collateral, such as other assets, personal guarantees, or liens on your business property.

2 Condition of equipment

The condition of the equipment also influences the collateral requirements. New equipment usually has higher collateral value than used equipment, because it has less wear and tear, depreciation, and obsolescence. However, some lenders or lessors may accept used equipment as collateral if it is well-maintained, certified, and has a long useful life. You may need to provide proof of the equipment's condition, such as inspection reports, warranties, or invoices.

3 Financing terms

The financing terms, such as the amount, duration, interest rate, and repayment schedule, also affect the collateral requirements. The higher the amount and the longer the duration of the financing, the more collateral the lender or lessor may require, because they are exposed to more risk and uncertainty. The lower the interest rate and the more flexible the repayment schedule, the more collateral the lender or lessor may also demand, because they are giving up more potential income and liquidity.

4 Credit profile

The credit profile of your business and yourself as the owner or manager also impacts the collateral requirements. The better your credit history, score, and rating, the less collateral the lender or lessor may require, because they perceive you as a more trustworthy and reliable borrower or lessee. The stronger your financial statements, cash flow, and profitability, the less collateral the lender or lessor may also ask for, because they see you as a more capable and solvent payer.

5 Market conditions

The market conditions of your industry and the economy also influence the collateral requirements. The more stable, growing, and profitable your industry is, the less collateral the lender or lessor may require, because they expect you to have more demand, revenue, and growth potential. The more favorable, stable, and predictable the economic conditions are, the less collateral the lender or lessor may also demand, because they face less volatility, uncertainty, and risk.

6 Negotiation skills

The last factor to consider is your negotiation skills. You can try to negotiate the collateral requirements with the lender or lessor by presenting a strong business case, highlighting the benefits and features of the equipment, comparing different financing options and offers, and asking for concessions and discounts. You can also seek the help of a broker, an advisor, or a lawyer to assist you in the negotiation process and protect your interests and rights.

7 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?