Quick overview

When lenders consider equipment as collateral, they’re estimating what they could recover if a borrower defaults and the lender must repossess and resell the asset. That practical resale value — adjusted for depreciation, removal costs, and marketability — drives the loan-to-value (LTV) the lender will permit and the interest, fees, or covenants attached to the loan.

This article explains the valuation steps lenders use, what documentation you should prepare, typical LTV ranges, how different lenders treat equipment, and practical actions you can take to improve the value lenders assign to your machinery or technology. It also includes real-world examples from my work advising small businesses and links to related FinHelp guides.

How lenders determine equipment value (step-by-step)

Lenders blend objective data, professional appraisal, and market judgment. Typical steps include:

  1. Identify the asset and ownership. Lenders verify title and check for existing liens (UCC-1 filings) that affect priority. A clear ownership chain increases value.
  2. Confirm make, model, age, serial numbers, and maintenance history. Detailed records reduce perceived risk.
  3. Assess condition and operability. Fully functional equipment with recent maintenance is worth more than similar but neglected units.
  4. Apply depreciation and resale adjustments. Lenders use industry depreciation schedules or market comparables to estimate current fair market value.
  5. Consider market demand and location. A high-demand machine in a major metro has better resale potential than a niche asset in a thin market.
  6. Factor in recovery costs. Transport, storage, repair, auction fees, and legal costs lower recoverable value — lenders discount accordingly.
  7. Set a loan-to-value (LTV). After discounts, lenders decide the LTV (commonly 50%–80% depending on asset and lender type).

Each lender weights these elements differently — banks, equipment financiers, and SBA‑backed lenders have distinct appetite and valuation formulas.

Typical loan-to-value (LTV) ranges and examples

  • Full-service banks: 50%–70% LTV for used industrial equipment, often lower for tech that becomes obsolete quickly.
  • Equipment finance companies: 65%–85% LTV for newer equipment and OEM-backed deals.
  • SBA 7(a) lenders: May take equipment as collateral but will also require additional collateral or guarantees; valuation follows SBA guidance and lender policy (see SBA resources).

Example 1 — Construction equipment

  • Original cost: $120,000
  • Age: 4 years (useful life 10 years)
  • Market comparables and condition indicate current market value ≈ $60,000
  • Lender recovery discount and costs: 25% → adjusted collateral value $45,000
  • Lender LTV offered: 60% → maximum loan secured by equipment = $27,000

Example 2 — Commercial kitchen gear

  • Market value (used, good condition): $40,000
  • Lender standard discount: 20% → $32,000 adjusted value
  • LTV offered by equipment lender: 75% → loan proceeds ≈ $24,000

These examples show why lenders often offer significantly less than a seller’s book or purchase price.

Types of lenders and how they differ

  • Commercial banks: Conservative valuation, strong emphasis on financial statements and cross-collateralization. Banks focus on recoverability and regulatory risk management.
  • Independent equipment lenders/lessors: Specialists with deeper industry knowledge and higher LTVs for particular asset classes (e.g., medical imaging, construction equipment).
  • Alternative/online lenders: Can be faster but may charge higher rates and apply steeper discounts.
  • SBA-backed loans: The SBA encourages lending to small businesses, but SBA lenders still require solid collateral and often subordinate lending to the SBA’s guidelines (SBA: https://www.sba.gov).

Documentation lenders expect

Prepare to provide:

  • Purchase invoices and title documents
  • Maintenance logs, service records, and operator manuals
  • Photos and serial/ VIN numbers
  • Recent independent appraisal or market sales comps
  • Insurance declarations showing coverage and loss payee clauses
  • List of existing liens or UCC filings

Having these ready shortens underwriting time and often improves the LTV you’re offered.

Appraisals and valuation specialists

Lenders may accept one of the following:

  • Dealer quotes or trade-in offers (useful for standardized assets)
  • Broker or market comparables report
  • Third-party professional appraisal from an equipment appraiser or an accredited machinery & technical specialists association

A certified appraisal reduces lender uncertainty. If you expect to borrow against equipment, invest in an appraisal before shopping lenders.

Legal and practical considerations: liens, repossession, and priority

When equipment is pledged, a lender typically files a UCC‑1 financing statement to establish a security interest. That filing affects future sales and third-party financing. Prior liens reduce what a later lender will value as available collateral. Understand your state’s laws on repossession and notice requirements — lenders exercise these rights if payments default (see FinHelp’s guide on security interests: “Understanding Security Interests: Fixtures, Equipment, and Inventory”).

Tax and accounting notes

Depreciation for tax purposes (IRS guidance) does not equal market resale value. The IRS allows accelerated or straight‑line depreciation for tax records, but lenders base collateral value on marketability and condition, not just tax book value (IRS: https://www.irs.gov). Always separate tax accounting from collateral valuation discussions.

How to maximize the collateral value of your equipment

  1. Keep meticulous maintenance records and log hours or cycles; good records increase buyer and lender confidence.
  2. Obtain a recent professional appraisal before shopping lenders. This often improves LTV and speeds approval.
  3. Remove personal effects and ensure equipment is clean and photographed.
  4. Maintain comprehensive insurance and name the lender as loss payee.
  5. Consider timed upgrades: newer equipment tends to fetch higher LTVs with equipment lenders.
  6. Shop lenders — specialist equipment financiers often value specific asset types higher than generalist banks. Compare offers and negotiate based on appraisals and comps.

In my practice advising construction and food-service clients, sellers who prepared maintenance logs and a fresh appraisal typically received 10–20 percentage points higher LTV than those who did not.

Common misconceptions

  • “My purchase price equals collateral value.” Not true — lenders focus on current marketability and the likely price at resale.
  • “All lenders value equipment the same.” Each lender uses different discount rates and has different appetite by asset class.
  • “If I owned the equipment free and clear, I can borrow its full value.” Even unencumbered assets are discounted for resale costs and liquidity.

Related FinHelp resources

Practical checklist before you apply

  • Gather purchase invoices, serial numbers, and titles
  • Create a maintenance log packet and take high-quality photos
  • Get a professional appraisal for higher-value assets
  • Check for existing UCC filings and clear any subordinate liens if possible
  • Compare offers from at least three lender types (bank, equipment lessor, and specialist)

Final thoughts and disclaimer

Equipment can be one of the most liquid forms of collateral for a business loan when it’s well‑documented and in demand. Proper preparation — clear title, recent appraisal, and solid maintenance records — often translates directly into better loan proceeds and terms.

This article is educational and based on industry practice and published guidance (Small Business Administration and IRS resources). It is not individualized legal or financial advice. Consult a qualified attorney, accountant, or equipment finance professional for decisions specific to your business (SBA: https://www.sba.gov; IRS: https://www.irs.gov).