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Three Mistakes Lenders Make When Determining the Value of Borrowers’ Equipment

October 8, 2014

NEBBI LendersAfter weathering the economic downturn, lenders know better than anyone the importance of doing due diligence before granting a loan to a business. SBA backed lenders are once again lending money, but with caution. One of the ways they exercise this caution is to conduct their own appraisals of collateral. This ensures that they will be able to recoup their losses in the event of a default. When determining equipment values, lenders should carefully avoid these three mistakes:

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

Auctioneers and dealers could have a hidden agenda. Most of these people are not certified appraisers or trained in providing USPAP-compliant appraisal reports. A Certified Machinery and Equipment Appraiser (CMEA) who is a member of the NEBB Institute exceeds the experience and training requirements many governing authorities hold. Ask if your appraiser is certified. If not, you open yourself to greater cost, liability, risk, and an unsubstantiated equipment appraisal.

Mistake #2: Guessing at equipment values.

Guessing is a huge risk because your loan file won’t have 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 and will not provide the fair market value, orderly liquidation value, or forced liquidation value.

Every day bankers and lenders are asked to make decisions that involve determining a realistic, independent value for machinery or equipment.

If you are a lender, making loans to small businesses so they can purchase machinery or equipment, be sure that the appraisal is conducted by a certified professional.

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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