Running a construction business or any industry that relies on heavy equipment can be capital-intensive. Machines like bulldozers, excavators, cranes, and dump trucks are essential to operations but come with hefty price tags. Balancing equipment needs and cash flow means businesses need financing options to keep operations running smoothly. That’s where an asset-based loan comes into play.
Asset-based financing (ABF) is a loan or line of credit secured by business assets. These assets can include accounts receivable, inventory, real estate, or—most commonly in the construction and industrial sectors—heavy equipment. Unlike traditional loans, which heavily depend on credit history and cash flow, ABF relies on the value of tangible assets as security.
Heavy Equipment Makes Excellent Collateral
Heavy machinery and other equipment are prime collateral for asset-based financing because they hold significant resale value, have a long operational lifespan, and are crucial to business operations. Here’s why lenders view heavy equipment as strong collateral:
- High Resale Value: Unlike some assets that depreciate quickly, well-maintained construction equipment retains value over time. Brands like Caterpillar, Komatsu, and John Deere have strong resale markets, making them desirable collateral for lenders.
- Long-Term Usability: Proper maintenance ensures that heavy equipment can remain operational, sometimes for decades, so its collateral value doesn’t diminish quickly.
- Tangible and Trackable: Unlike unsecured loans, which carry higher risks for lenders, heavy machinery is a physical asset a lender can appraise, insure, and repossess if necessary.
- Industry Demand: The construction, mining, and agriculture industries constantly demand equipment, which makes assets easier to sell in case of loan default.
If your fleet is well maintained, lenders are more likely to consider asset-based financing to get you the capital to drive business success.
The Asset-Based Loan Process When Using Equipment
Using your heavy equipment as collateral to secure capital is a simple process. Here’s what to expect:
- Asset Valuation: The lender appraises the equipment to determine its current market value, considering brand, age, condition, and market demand.
- Loan-to-Value Ratio (LTV): Lenders offer financing based on a percentage of the equipment’s value—typically between 50% and 80% of its appraised worth.
- Loan Terms and Interest Rates: The lender sets repayment terms based on the company’s financial stability, loan amount, and perceived risk. Since the equipment secures the loan, interest rates may be lower than those of unsecured loans.
- Funding Disbursement: Once the loan is approved, the business receives funds for working capital, equipment upgrades, payroll, or other business needs.
- Monitoring: Some lenders require periodic appraisals or equipment condition tracking to maintain collateral value.
- Repayment and Release: After loan repayment, the lender will release its claim on the equipment.
Advantages of Using Heavy Equipment as Collateral
Using part of your equipment fleet as collateral for your asset-based loan comes with various advantages that include:
- Keep Steady Cash Flow: Construction and industrial companies often experience delayed client payments, leading to cash flow crunches. Using existing equipment as collateral allows businesses to unlock payroll, materials, or project expansion funds without waiting on outstanding invoices.
- Customizable Financing: Unlike traditional bank loans, asset-based financing offers more flexibility. Companies can work with their lender to choose the best financial tools for their business needs.
- Easy Approval Process: Sometimes traditional bank loans aren’t an option. Since your equipment secures the loan, lenders are often more willing to approve financing, even if a business has a lower credit score or inconsistent revenue.
- Retain Ownership: Instead of selling valuable equipment to generate funds, businesses can use asset-based financing to access the cash they need while maintaining equipment ownership. This is particularly helpful when your company relies on machinery for daily operations.
Risks and Other Considerations
While asset-based financing has many benefits, there are risks and responsibilities you should consider.
- Depreciation Impact: Heavy equipment depreciates over time, meaning the loan amount a company can access today might be lower. Be aware of how depreciation affects borrowing potential.
- Risk of Repossession: Your lender will seize the collateral equipment if you don’t repay the loan. To protect your assets, have a solid repayment plan in place.
- Interest Costs and Fees: An asset-based loan may have a lower interest rate than other financial solutions, but there are still fees. Take the time to ask questions to understand the total cost of borrowing.
Maximize the Value of Your Equipment
To get the most value from your heavy equipment, try these strategies:
- Maintain your equipment. Keep your machinery in top condition to maintain higher appraisal values and increase your borrowing potential.
- Keep detailed records. Maintain service logs, purchase records, and warranties. Good recordkeeping helps lenders assess equipment and speeds up the loan process.
- Choose high-demand equipment. Certain brands and types of machinery retain value better and are easier to use as collateral.
- Work with a lender that knows your industry. Find a financial institution specializing in your industry and heavy equipment financing, offering better terms and understanding industry-specific needs and financing solutions.
- Create a detailed repayment plan. Have a clear strategy to repay the loan that doesn’t disrupt operations or risk asset seizure.
Partner With Your Industry Expert to Find the Solutions You Need
Asset-based financing using heavy equipment can be just what your business needs to unlock much-needed capital, improve cash flow, and fuel growth without sacrificing daily operations.
Equify Financial knows the construction industry and actively seeks partnerships that help business owners thrive. Your local representative will get to know your business beyond the numbers to find the solutions you need to thrive in your market. Where other banks say no, we work with you to find the customized solution to get you the capital you need to achieve your business goals. Let’s talk about what creating a partnership with Equify Financial can do for your business.
