In a leaseback, how much collateral coverage is necessary? Most lenders will require anywhere from a 2 to 1, all the way up to a 10 to 1 ratio, in the case of some banks.
In these cases, the lenders are basically covering themselves to avoid any losses in the event of a default, requiring more, or far more collateral than will ever be necessary to cover their capital investment.
The lowest collateral coverage in some cases is as low as 60% of the amount of the debt, which essentially results in a partially secured transaction.
The type of equipment involved often is a factor in the amount of collateral required. For heavy equipment and machinery, less value will often be required due to this type of equipment holding it’s value longer. Computer equipment will often require a higher amount for the same amount of funding.
Some type of equipment will simply not be accepted as collateral in a leaseback. The more specialized the equipment, the more likely it will not be accepted. In many cases, computer or electronic equipment will simply not be accepted. Other types of equipment that often are not accepted are smaller pieces of equipment with a value of less than $1,000 or $2,000, including such things as tools, hand pieces in the case of medical.
Potential leaseback customers should not be surprised for 200% or higher in collateral value to be requested for these transactions.
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