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How Do You Know The Value Of Your Customers’ Equipment? Three Mistakes that Lenders Make

October 17, 2012

Since the economic downturn of the last few years, lenders know almost better than anyone that they need to do the necessary due diligence before giving a loan to a business. Even in today’s tight economic environment, lenders backed by the SBA are lending money, but they are increasingly more cautious. They are conducting more careful due diligence, which includes their own certified appraisals of collateral to ensure that they will recoup their losses should a loan default. Lenders need to watch out for these three mistakes when determining equipment values.

 

Mistake #1: Relying on the word of an uncertified person to deliver a value on equipment.

 

Auctioneers and machinery and equipment dealers may have a hidden agenda. The majority of these individuals are not certified or trained in providing USPAP compliant appraisal reports. If the appraisal report you obtain is not USPAP compliant, it is not a qualified appraisal prepared by a qualified appraiser pursuant to the Council of Foundations, IRS, or others. A Certified Machinery and Equipment Appraiser (CMEA) who is a member of NEBB Institute, meets and exceeds the experience and training requirements of many governing authorities. Beware if the individual does not have a certification. You will only be opening yourself up to increased costs, liability, risk, and an unsubstantiated equipment appraisal.

 

Mistake #2: Guessing at equipment values.

 

Guessing is filled with liability and risk. The loan file will not contain the substantiation needed to support a loan decision.

 

Mistake #3: Relying on the depreciation schedule.

 

A depreciation schedule is only important to the business owner, CPA, and the IRS. The depreciation schedule will not provide the fair market value, orderly liquidation, or forced liquidation value. Once again, this method is filled with liability and risk.

 

Every day bankers, lessors, and lenders come face-to-face with decisions that involve arriving at a realistic, independent value for machinery or equipment. If you find yourself to any of these situations, you are in need of an Independent Certified Machinery and Equipment Appraisal by qualified appraiser preparing a qualified appraiser.

It is a mistake to guess at the value of a piece of equipment, both because the guess could be incorrect and because a guess would make it difficult to support a loan decision. It also is not a good idea to base the value of a piece of machinery on the depreciation schedule. Depreciation schedules, although valuable to business owners and accountants, will not provide the fair market, orderly liquidation, and forced liquidation values of the equipment, and these three values would become important in the event of a loan default.

To reduce their liability, lenders making loans for the purchase of equipment should be sure that the appraisal is conducted by a certified professional. CMEAs meet all government training requirements, and will provide appraisal reports that are USPAP compliant and will stand up to scrutiny in a court of law.

The NEBB Institute endorses and strives to observe the highest standards of professional ethics to preserve the public trust inherent in the professional appraisal practice. The Institute provides initial and monthly comprehensive education, ongoing support, and a dynamic international network, and certifies professionals in the art of machinery/equipment appraisal and brokerage.

By: NEBB Institute

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