In an leaseback, in which equipment is taken as collateral to obtain working capital, equipment generally depreciates quickly and is not generally considered the best collateral.
However, since these transactions are most commonly done by businesses, leaseback collateral may be among the strongest forms of collateral.
Most businesses need the equipment they have in order to continue operations and keep the business open. If they lose their equipment, they may well be out of business. This is true from dentists, to construction companies to technology companies and many other types of businesses.
If a company is in danger of defaulting, the owners will realize quickly as they become past due, that if they default and their equipment is picked up, they will be out of business. As a result, there will be a tremendous amount of motivation on the part of the business to make all the payments required on the transaction.
In the eyes of the lender, they will likely lose part of their equity in a default and do not see the collateral as valuable. However, the lender’s risk may not be as dire as it seems, as the business will be very motivated continue payments in order to keep the equipment.
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