Financing $150k of equipment for 8.5% and 20% equity.

August 27, 2021

by a searcher from Lafayette College in Charlotte, NC, USA

One of my targets approached me for help with equipment finance. The business is a niche construction business that needs to replace a key piece of equipment for $150k. The original was destroyed by a third party. The owner is currently working through insurance/courts for damages but needs replacement equipment to perform ~$500k of backlogged work. Lead time on the new equipment is 3-5 months.

The owner has proposed 8.5% interest 5y term and 20% of the business and is flexible on rate etc. Debt would be secured by the piece of equipment.

Positives: I like the segment that the business is in and have previously looked at purchasing a competitor. This business has a strong reputation. $150k is fairly cheap for 20% of the company.

Negatives: If the owner defaults re-selling the equipment would be challenging. I don't necessarily want to tie up $150k (I am a self-funded searcher). 8.5% seems low. I don't love the idea of minority ownership.

What else would you ask for as collateral? What rate would you propose? Could I purchase the equipment in a separate entity, finance it and mark up the rate to the business?

Reply by a lender
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA

So it looks like you are considering financing the equipment for them. A couple of approaches. You could finance the equipment for them, but you would then need to have them sign a promissory note, security agreement, file a UCC against the equipment, be sure it is insured, etc. It would require some legal costs on your end and then you would have to manage the loan going forward. The other option would be to buy the piece of equipment and lease it to them. In that case you own it and they just sign a lease agreement. You likely would still have them provide you insurance. You could charge interest / return on the lease as well. Either way, I would not say 8.5% is a bad interest rate, but the rate someone would qualify for would all depend on credit, financial strength, etc. We are doing equipment financing for strong companies with good credit starting as low as 3.5% fixed for 5 years with Banks all the way up to the 8% range with banks for higher risk credits. With non-bank lenders we see some deals as low as 7% going all the way up to the low 20% range, again depending on credit and risk. If you are not interested in doing the deal, I might know some lenders that would take a look at it. Many of the programs we have if they are borrowing $150,000 or less are just simple application products with minimal financial information available. Most lenders will require some down payment but some will finance 100%. I hope this helps. If you have any other questions I can be reached at redacted Have a great day!

Reply by a professional
from Hobart and William Smith Colleges in Chicago, IL, USA

You could certainly put a lien on the $500k of backlogged work, and other receivables, as well as other equipment that is in working order if you are not feeling like you are secure enough.

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