Lenders working on an SBA loan involving the purchase or collateralization of equipment often face a critical decision: should they opt for a desktop or on-site equipment appraisal? For 504 loans, SBA SOP 50 10 8 states “the equipment appraisal needs to be a written document from a person that is qualified to provide a valuation, is independent of the transaction, and has performed an on-site inspection of the equipment.” This removes all ambiguity; you must have an on-site appraisal for a 504 Loan. However, for SBA 7a loans, the SOP does not specify whether a desktop or on-site appraisal is required. Giving lenders more flexibility in determining which type of appraisal best suits the situation.
Understanding the advantages and limitations of each approach is essential to determining which appraisal best suits your needs.
Desktop appraisals are a cost-effective method, as they rely on accurate data collection rather than physical inspection. With proper data collection techniques, appraisers can develop a supportable opinion of value while reducing travel costs and time spent on-site. This approach is often suitable for standardized equipment when adequate data is available
Because they do not require scheduling and executing an on-site visit, desktop appraisals are quicker. Equipment deployed across several locations or mobile equipment may not be logistically feasible to appraise in person. Often, in a business acquisition, sellers are reluctant to disclose to staff that the business is being sold, and having an appraiser on-site could spark unwanted questions.
A common challenge of a desktop appraisal is collecting reliable information. Businesses sometimes struggle to compile a complete asset list with accurate supporting data. Fixed asset schedules are notoriously inaccurate and include vague descriptions of the assets (e.g., “Equipment 2019 – $120k”). The gathering of reliable information can delay the appraisal process or, worse, result in an inaccurate valuation.
Rather than appraisers simply valuing a provided list, they should use an approach that verifies the existence and attributes of the assets being appraised. A proper desktop appraisal should include some form of additional examination. For instance, checking multiple sources of documentation, or prodding the client on the development of the information provided. How was the list created and by whom? Do the assets listed match the latest insurance renewal or financial reporting? Are invoices for recent major purchases available? Do VIN numbers match Blue Book databases? Knowledgeable appraisers have ways to flesh out reliable data to support their findings.
Leveraging technology. The term “desktop” has evolved alongside the rest of technology. Consider having your appraiser speak with the stakeholders on a video call and review the equipment remotely. Videos or photos of the equipment aid in asset verification and condition assessment.
On-site appraisals provide the lender the highest level of confidence that the assets being valued actually exist and are functioning. On-site appraisals routinely uncover “ghost assets”: equipment listed on the fixed asset register but that no longer exists or has been rendered unusable. Conversely, occasionally, assets that were previously overlooked are discovered.
On-site appraisals are especially effective for capturing the full scope of customizable or modified equipment. For example, a client-provided asset listing may include simply the make, model, and year for a CNC machine. However, a physical inspection will identify significant features and upgrades that can dramatically increase the asset’s valuation. Businesses install customized components and routinely upgrade their equipment, and on-site appraisals yield a more refined, accurate identification of these enhancements.
Determining the condition of machinery and equipment is key to estimating its remaining useful life. Condition is also a primary factor in determining its value on the marketplace. On-site appraisals performed by a knowledgeable appraiser provide the best insight into how equipment is maintained, operated, and stored. Appraisers can observe the true current physical deterioration, including visible signs of rust, leakage, dents, cracks, and current use.
On-site appraisals include comprehensive data collection, such as photos capturing exterior and interior views, odometer and/or engine-hour readings, and images of the vehicle’s serial plate. This visual documentation provides critical context and support. Proper asset identification data is key when underwriting collateral and crucial in scenarios where assets need to be liquidated.
As every lender knows, treating the company with respect is paramount when dealing with small businesses. Our clients have invested considerable time and resources in growing their businesses and appreciate that the lender/appraiser is paying them the attention an on-site appraisal provides. A good appraiser takes the time to truly get to know our clients and their businesses. They are flexible in scheduling, often performing walkthroughs in the off hours to avoid disrupting operations or alerting staff that the business might be sold. This personal touch goes a long way toward ensuring client comfort throughout the loan process.
As no two small businesses, or SBA 7a loans, are the same, neither should be the approach to their appraisal.
When performed correctly, desktop, on-site, and hybrid approaches to Machinery and Equipment appraisals will yield a supportable opinion of value for an SBA 7a loan. In addition to the value of equipment as part of the deal and internal policies, you should consider the attributes mentioned in this article. As always, consider contacting your appraiser to determine the right course of action.
For more information on this topic, please contact a member of our team.
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