Buying used equipment has unique hurdles

One of the many questions I get from my customers is whether financing is possible to buy a good, late-model, or demo piece of machinery.

The reality is machinery is expensive, whether it’s purchased outright or through monthly payments, and significant savings can be gained if you can find a good, used piece of equipment. This is because the initial depreciation of the asset will already have been paid by the original owner.

From my experience as a seller of new high-end Japanese equipment, I have always felt that a new machine likely loses between 25 and 30 per cent of its value in the first year.

To get a sense of why a machine depreciates that much in the first year, you have to look at it from a potential buyer’s perspective. If you buy a new machine, you typically have to pay warranty, installation, and even shipping fees. Used machines lose this “value” quickly.

From the lender’s perspective, the advantage of financing used machinery is the depreciation after the first year is minimal for the next four or five years because a good, brand-named machine tool, which has been properly serviced and maintained, will hold its value for a very long time.

Exit Strategy

A lender’s first concern when financing any asset, new or used, is exit strategy in the event the deal goes sideways.

They want comfort in knowing that the asset can be resold, with relative ease and in a short period of time, which recovers a significant portion of the loan.

When it comes to getting financing from a bank, the quality of the asset, and in turn its perceived resale value, factors very little when the applicant is reviewed; therefore, the credit department will struggle to get this type of transaction approved, or it may get rejected outright because the asset is used. This is a situation in which an alternative lender that has industry experience can get a deal done.

Although it is important to understand that financing is out there for used equipment, it is just as important to look at how a seller of a used machine will want to be paid.

Buying Used Equipment

It is almost universal within the machine tool industry that the seller will insist on payment in full before shipping. This is because the buyer is responsible for loading, unloading, and shipping of the equipment, all of which could affect the functionality of the machine if not done properly.

Reputable sellers arrange an inspection of the machine while it’s under power, but once that has been completed and the machine accepted, they will want funds transferred before any pickup arrangements are confirmed.

Even though this is an industry standard, it can cause issues with the financing company, particularly if it is a bank, because banks do not normally provide any funding until the machine has been delivered. There is no doubt I have landed new customers specifically because of this issue because we, along with other alternative funding institutions, have no problem paying established used-equipment sellers in full before shipping.

Now this does not mean a manufacturer cannot use its chosen financial institution, but it could lead to bridge financing of the deal. Bridge financing essentially provides the seller with funds and then gets money back from the second funding source, such as an alternative lender, once the equipment has been delivered. This method does come with a caveat, however, which is called a General Security Agreement (GSA).

Regardless of what service it is providing, a bank will ensure it is in an extremely secure position. It is not uncommon for a typical bank to have security that is three or more times the value it is lending, which means all the assets of the company, guarantees of the shareholders, and sometimes even personal property are needed to provide this security. A GSA is the document that provides the lender a security interest in the specified asset or property that is pledged as collateral.

Worst-case Scenario

If a borrower defaults, the pledged collateral can be seized and sold.

The relevance is that once a manufacturer pays for equipment, it becomes part of the bank’s security agreement, and if the manufacturer is financing with any other funder besides its bank and the transaction needs to be bridge financed, the only way to get their money back is for their operating bank to waive its interest in the asset. Intuitively this does not make sense, because a bank shouldn’t have any interest in an asset it did not provide any funding for, but such is the case once a GSA is in place.

Now, as long as a waiver is provided -- a simple document that the bank signs waiving its interest in a specific asset or piece of equipment -- any other lender will be able to provide the funding.

Financing for used equipment is certainly available, but it’s very important to understand where it can be found, how to handle this type of transaction particularly from a payment standpoint, and what the implications are.

Ken Hurwitz is senior account manager, Blue Chip Leasing Corp., 416-614-5878, www.bluechipleasing.com.