Can you borrow against rental equipment that is out on rent?

A rental business has an unusual collateral profile: a large, mobile, depreciating fleet that earns money precisely when it is somewhere a lender cannot easily see it. Lending against it works, and the structure is specific.

Rental receivables are 220,000, of which 190,000 pass the eligibility tests. At an 85 per cent advance rate that is another 161,500.

Total availability: 1,324,000, against a fleet that cost 3,100,000 and produces 168,000 a month of rental revenue at 62 per cent utilisation — 2,016,000 a year, or 65 per cent of the fleet's original cost.

Why location does not defeat the lien

A security interest in equipment attaches and is perfected by filing a UCC-1, and the interest continues in the collateral notwithstanding that it has been rented out. A customer renting a machine acquires a possessory right under the rental contract, not ownership, so the lender's interest is not cut off.

What location does affect is verification and practical recovery. An appraiser and a field exam need to confirm that the units on your schedule exist, are in the condition claimed, and are where your system says they are. That is straightforward for units on the yard and laborious for units spread across sixty job sites. The practical answers a lender will want:

• A fleet management system that tracks each unit by serial number, status, location and customer, and can produce a report as at a date.
• Telematics on the higher-value units, which resolves the location question entirely for those.
• A physical count protocol for the yard, and a sampling approach for units on hire — typically customer confirmations plus a sample of physical inspections.

An operator whose fleet records are a spreadsheet updated weekly will get a lower advance rate for that reason alone, and will deserve it.

Orderly liquidation value is the only number that matters

Original cost is irrelevant. Book value, which follows a depreciation schedule chosen for tax reasons, is close to irrelevant. What sets availability is an appraiser's estimate of what the fleet would fetch in an orderly disposal over a defined period.

That estimate depends on:

• Fleet age and hours. A predictable curve, and the reason lenders watch your capital expenditure. A fleet that is not being refreshed is a shrinking borrowing base.
• Brand and model liquidity. Standard, widely used models have deep secondhand markets. Specialised or orphaned equipment does not.
• Condition and maintenance records. Documented service history is worth real money in an appraisal.
• Attachments. Frequently a meaningful share of value and frequently missing from the schedule.
• Market timing. Used equipment values move, and a re-appraisal in a soft market reduces availability with no change in your fleet.

Expect annual appraisals at minimum, and expect the facility to reset availability when the appraisal lands.

The rental-purchase problem

Rental-purchase option arrangements, where accumulated rent applies toward a purchase price, convert a piece of equipment into a receivable partway through. That is good business and it has two effects on the facility.

First, the unit leaves the equipment pool. On the numbers above, if 240,000 of orderly liquidation value converts to rental-purchase contracts, equipment availability falls by 180,000. Whether the resulting instalment receivable is eligible, and at what advance rate, depends entirely on how the facility is drafted.

Second, the accounting changes, and with it the covenant measurements. A sale recognised on conversion moves revenue from rental to sales and changes the earnings picture in the period.

Ask explicitly how rental-purchase conversions are treated in the borrowing base before you sign, and how many you expect to do in a year. An operator doing a large share of business this way may need a facility with a dedicated instalment receivable line.

The eligibility tests to check

• Units on hire to a single customer above a concentration threshold, which can become partly ineligible.
• Units out of service for repair or awaiting parts, usually excluded.
• Units at locations in states where no filing has been made, if the facility requires filings in each state of operation. Article 9 generally perfects at the debtor's location rather than the collateral's, but titled goods are the exception.
• Titled equipment. Trailers, road-going trucks and some machines are titled, and perfection follows the certificate of title statute rather than a UCC filing. A lender must be noted on each title, which is an administrative burden that operators regularly underestimate. The distinction is covered in financing titled equipment, trucks versus machines.
• Rental receivables past the ageing cut, and any customer-disputed amounts.
• Consigned or managed equipment owned by someone else and rented through your yard, which is never your collateral.

What to have ready

A fleet schedule by serial number with acquisition date, cost, hours or age, current status, location, customer and last service date. A current third-party appraisal, or the acknowledgement that the lender will order one. Utilisation by category for 24 months — dollar utilisation, not just time utilisation, since a fleet running at 62 per cent time utilisation at collapsing rates is a different business from the same fleet at rate. A rental receivable ageing. A capital expenditure plan, because the lender is lending against an asset that shrinks unless you spend. Insurance certificates with the lender as loss payee on the fleet.

What to ask for and what to refuse

Ask how often availability is re-set against a new appraisal, and what happens if the appraisal comes in below the prior one — specifically, whether you must pay down immediately or over a period. That single term decides how survivable a soft used-equipment market is.

Ask whether new fleet purchases are added to the borrowing base at cost or at appraised value, and how quickly. A facility that only recognises new units at the next annual appraisal is a facility that will not fund growth.

Refuse a facility that treats every unit on hire as ineligible; that is not how the collateral works, and an operator should not accept a lender who thinks it is. And refuse to rely on a borrowing base you cannot reproduce yourself — if you cannot generate the certificate from your own fleet system in an hour, the certificate will be wrong at exactly the wrong moment.