When Does a Lender Need an Equipment Appraisal?

An appraisal answers a simple question: what is the equipment worth?

In many purchases, the answer is easy enough to support with a dealer quote and an active market.

In other transactions, the lender needs independent evidence because the agreed purchase price may not reflect market value.

Standard dealer purchases often need less value work

A current machine sold by an established dealer with a normal market price is relatively straightforward.

The lender may still review the asset, but a formal appraisal may add little if there is already enough market evidence.

Used and specialized equipment can be different

A ten-year-old custom production machine may have no obvious comparable sale.

The lender may want an appraisal, dealer opinion, auction evidence or other value support before deciding how much it is willing to finance.

Related-party transactions deserve extra scrutiny

If the buyer and seller are related, the lender cannot rely on an arm's-length negotiated price in the same way.

The Canada Small Business Financing Program specifically requires an appraisal in certain non-arm's-length transactions under its rules.

Conventional lenders may also request independent support in related-party sales.

Refinance and sale-leaseback usually depend heavily on current value

When a business already owns the machine, there is no current purchase price from an unrelated seller to anchor the transaction.

The lender is trying to determine how much equity exists in the equipment today.

That makes valuation especially important in equipment refinance and sale-leaseback transactions.

What can an equipment appraisal include?

The scope depends on the appraiser and lender, but it may consider:

• Make and model
• Year
• Serial number
• Condition
• Hours or usage
• Configuration
• Recent comparable sales
• Dealer listings
• Marketability
• Estimated orderly or liquidation value

Who can provide the appraisal?

The lender decides what it will accept.

Under the CSBFP, ISED notes that an equipment appraisal can, in certain circumstances, be provided by an arm's-length supplier of similar equipment, auctioneer or expert in the field. A conventional lender may have different standards.

Do not order an expensive appraisal before asking the lender

An appraisal can cost money and take time.

If the lender does not require one, ordering it in advance may not help. If the lender does require one, it may have specific instructions on acceptable format or appraiser qualifications.

Frequently asked questions

Does every used machine need an appraisal?

No. Many used equipment purchases can be reviewed using dealer quotes, market evidence and asset information.

Does a private sale require an appraisal?

Not always. The lender may request one if value is difficult to establish.

Can an appraisal increase the amount financed?

An appraisal supports value; it does not guarantee a particular advance. The lender still applies its own credit and structure limits.

How recent does the appraisal need to be?

That is lender-specific. Ask before ordering one.

Use appraisal work where it actually changes the file

If your transaction involves specialized used machinery, related parties, refinance or sale-leaseback, tell Raymond Leigh at the beginning. We can identify whether value support is likely to be required before you spend money on it.

Different values can serve different purposes

An appraisal may distinguish fair market value, orderly liquidation value and forced liquidation value. Those concepts are not interchangeable.

A lender concerned about recoverability may focus on a more conservative value than the price a patient retail seller hopes to achieve.

Appraised value does not equal financing amount

Even when an appraisal supports a strong value, the lender may advance only a portion of that amount. Credit quality, asset type, term and other risk factors still matter.

An appraisal answers the value question. It does not answer the entire credit question.

Physical inspection may be part of the valuation

For specialized or high-value machinery, the appraiser may need to inspect the equipment, verify serial numbers and assess condition. That can take time, especially if the machine is remote or already dismantled.

How appraisal timing affects closing

If the seller expects payment in three days, discovering on day two that the lender requires an appraisal can derail the transaction.

Raise unusual asset or related-party issues early so value work can start before the closing deadline.

Keep the appraisal independent

A lender may reject value support from someone who has a financial interest in the sale. Ask what type of appraiser or expert it will accept before ordering the report.

Appraisal method should match the question the lender is asking

If the lender wants to know what a machine would sell for in an orderly sale, a retail asking price may not answer the question. If the lender is assessing collateral recovery, it may focus on a more conservative value basis.

Ask what value standard is required before the appraisal is commissioned.

Appraisal fees should be treated as part of closing costs

The borrower should understand who pays for the appraisal, when payment is due and whether the cost is refundable if the financing does not close. On a large machinery transaction, valuation can be a necessary closing expense rather than an optional report.