New company loan for equipment

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Business loan
Posted by: karlpinto Jul 20 2004, 03:31 PM

This may seem to be a rather naive question, but here goes. I am starting a new company with an equity capital base of $2.5m (for which I have confirmed investors). I have a business plan and a lot of faith backing this investment.

As a critical part of my business, I need to acquire and build out capital infrastructure (machinary etc.) to the tune of about $4m. What are my options? As far as I know, I could 1) take the new equipment on lease OR 2) take debt to the tune of $4m to build it out (the actual equipment/infrastructure will serve as collateral).

I’d like some advice on what might be a better option for me, an indication of costs I may be looking at and where might be the best place to start my search.


Posted by: loanuniverse Jul 20 2004, 05:56 PM

Yes you are correct about both options being available, but there is no way for me to tell which option is best for you. I mean in order to compare two financing options, you need to have the numbers in front of you. You really need to do some research on the actual costs of both leasing and borrowing.

Having said that, it is my opinion that owning is a better deal than leasing in most cases. When I look at some of the capital lease deals that some businesses carry on their books their cost usually run in the double digits as a percentage of cost.

It just occurred to me that you also need to think of taxes and the depreciation benefit of owning the asset.

You also need to take into consideration how long the assets are going to be used for or the true economic life of the machinery {I am not talking about the life as defined by the IRS depreciation tables}

As you can see, one really needs the numbers as well as an understanding of the business future plans to come up with an answer.
Posted by: karlpinto Jul 21 2004, 12:14 PM
Thank you, I believe your reply makes sense. Do you believe I would be able to borrow this $4m as a term loan given that I have $2.5m in equity on the books? I believe there are some debt-to-equity rules of thumb that banks/lenders have when taking out a first loan? Also, what are the typical interest rates I could expect for such a loan?

Posted by: loanuniverse Jul 21 2004, 06:01 PM
” Do you believe I would be able to borrow this $4m as a term loan given that I have $2.5m in equity on the books?”

A couple of things come into play. First, this is a startup, and as a startup most banks will not consider lending without some kind of strong guarantee. {think SBA}

Then you have to consider the type of equipment/infrastructure that you want to buy. Each bank has its own internal credit policy covering equipment loans, but the following is just my personal opinion about different situations.

For new equipment, I don’t think a lender should advance more than 90% of hard cost.

The longest amortization should be five years. I would go to 7 years if the equipment has a long economic life. Computer hardware no more than 3 years.

I think one should stay away from lending on restaurant equipment and highly specialized equipment.

Used equipment should be advanced at about 50% loan-to-cost and only if it is supported by an independent appraisal.

” what are the typical interest rates I could expect for such a loan?”

If you are able to get a mainstream lender to fund this as you have presented it so far, I would say a fixed rate between 7% to 9% would be a good range. The rate really depends on overall financial strength, agressivenes of the lender, and negotiation too so I am just throwing it out there.
Posted by: Rick Jul 23 2004, 10:58 AM

Just a few thoughts / comments from the government lending angle:

Government programs are an excellent method to secure financing so long as you do not think that it is easy or free money. We tend to look at the same criteria as commercial lenders i.e. strong business plan, ability to repay debt, strength of personal guarantees, etc but also will look strongly at the economic benefit to the gov’t (i.e. jobs created, tax revenue).

Presently, my organization will do a maximum amort of 10 years for equipment (special cases), but tend to be in the 5 to 7 years. Many gov’t lenders / programs are set up as ‘lenders of last resort’ and will price slightly higher than commercial banks and or private lenders. This is for two reasons: (1) generally higer risk associated with companies who access gov’t funding thus higher risk premium and (2) a desire to not compete on rates with commercial entities. All things being equal, a deal that a commerical bank would price at say 7.5% we would price at 8.5% or 9.0% (basically, we take the approach that if you can get a better deal in the private sector, then you do not need us).

Anyways, just a couple of thoughts from my end.

Disclamer: I work with a Canadian provincial government lending agency and not a US State / Federal agency; however, I have often found that on the term loan side of things we generally all look at opportunities the same way
Posted by: loanuniverse Jul 23 2004, 01:06 PM

Excellent points.

I think the presence of a strong guarantor {government / private} or a second lender {government / private}in a junior position would go a long way towards getting something like this approved by a mainstream lender.
Posted by: karlpinto Jul 24 2004, 06:22 PM
Thanks gentlemen, very useful inputs for my new endeavor. I will certainly keep these in mind as I make progress. We should be ready to commence doing work towards securing the loan in about 60 days. Rick, I might contact you if I need anything as it seems your organization might be able to assist.


PS: As I am of Asian/Indian descent, I might also consider approaching the MBDC for assistance as a guarantor.
Author: Commercial Loan Underwriter