How can I finance equipment in a business acquisition?

Equipment is a physical asset a lender can inspect and take security over. It is also where avoidable problems arise: a lien nobody searched for, or a price nobody allocated, can stall a loan that otherwise works. The groundwork is the same for every route.

The routes available

You can finance equipment as part of the acquisition loan, with a separate equipment loan, or under the Canada Small Business Financing Program, whose guidelines treat equipment as an eligible class of asset. BDC also lists a separate equipment loan among its business loans. Each lender decides how much of the price it will advance against equipment, so ask early.

Allocate the price first

The CSBF program’s guidelines say the purchase agreement for a going concern should allocate the price across the assets, such as real property, equipment, intangible assets, inventory and goodwill, and that an appraised value will not be accepted as that allocation. Write the split into the agreement and have your accountant review it.

Search for liens before you buy

Secured lenders register claims against equipment in provincial registries. British Columbia’s Personal Property Registry says to make sure personal property has no liens registered against it before you buy it privately or lend on its security, and Alberta’s registry lets you search for property used as security against a loan. Under the CSBF program, an equipment loan must be secured by a valid first charge registered in the provincial registry, so an existing claim has to be dealt with first.

Get an independent view of value

For an equipment loan, the program accepts an appraisal from an expert in the field, such as a supplier of similar equipment or an auctioneer, who is at arm’s length from the borrower. An appraisal is required in cases such as buying all or substantially all of a going concern’s assets, and the eligible cost is then the lesser of the cost and the appraised value. If you buy shares rather than assets, the program does not finance the shares. Pair this with a condition check on the equipment.