How does a bank analyzes the value of business property and equipment for a loan? Do they use the stated value on Financial Statement? Before or after depreciation? Is there any other documentation they would require??

Jim:

Banks start from the assumption that they are not property and equipment valuation experts and as such, rely on the advice of independent experts.

For real estate, the choice is obvious as there is a thriving industry in real estate appraisals.

For equipment loans that are large enough, there are several companies that can give estimates of value.

For smaller equipment loans, the lender might just get a list of the equipment, verify that it is actually there with a visit, and ask a third party to give an estimate.

Depreciation or the value that it is carried on the books is a poor second choice in my opinion.

Banks do rely on experts wherever possible and effective. At our institution, we have several lenders that are very familiar with a certain items (like values for semi-trucks or trailers, etc). The more specialised the equipment, the more likely the bank will require an independent assessment of value.

A lot of what determines how much specific information on the collateral is how comfortable they are with the deal in general. Not much help I suppose, but...

In my organization we will generally get an appraised value of the equipment using qualified appraisers (as Fox and Loan Universe discussed) then we will determine what the assets will yield in a forced sale situation. Depending on the type of asset, we set our valuation at either appraised or forced sale.

The "value" that shows on the balance sheet is pretty much meaningless to us, unless we are using it in ratio analysis.

Cheers,

Definitely. To me, the balance sheet values for assets are of limited use in collateral valuation because:

1) the depreciation schedules can't accurately reflect changes in value, (besides, fully depreciated/expensed items can still have significant value), and

2) that value is completely isolated from market forces (in a hot economy, manufacturing equipment will be in more demand - this fluctuates, sometime significantly).