Can Taking out An Equipment Loan Risk Your Entire Business?
Jan. 24, 2025
Did you take out a loan to buy expensive equipment for your business that is now worthless or at least worth far less than you still owe? Bankruptcy can help.
Businesses often take out loans to purchase equipment to grow the business, drive profits, and gain a competitive edge. But it doesn’t always work that way.
We have worked with many businesses that have found that sales reps’ hype does not always match reality, particularly in areas where the same equipment is sold to everyone else in that market region. We often see this with medical equipment for optional procedures. The market gets flooded, and doctors are left with huge loans on equipment worth a quarter of the purchase price. Meanwhile, the loan payments continue to come due and sales don’t cover the payments.
Another risk of equipment loans is that the machinery can become obsolete. This is especially true in rapidly changing industries such as the technology industry. Even if the equipment is no longer useful for your business, you will still have to pay off the loan.
The Risks of Personal Loans for Business Equipment
There are many types of business loans, but taking out a loan in which you also personally agree to pay the loan—in other words, making a personal guarantee—can put you and your business at risk if your equipment purchase does not live up to your expected results. Before making a personal guarantee for an equipment purchase, make sure that’s a gamble you are willing to take. Some banks require a personal guarantee, so reading the fine print on your loan contract is essential.
What is A Personal Guarantee?
A personal guarantee is a promise to a lender that you’ll repay the loan if your business can’t. If you can’t make the monthly payments, you could be on the hook for the entire loan amount, and your business and personal assets are at risk. Many, but not all, lenders require a personal guarantee for equipment purchases.
Most Equipment Loans Are Considered Secured Debt
In other words, if you can’t pay the loan, the lender has the right to repossess the equipment. Repossession can happen quickly, which means you may lose access to essential equipment for running your business. That can put you out of business. Often the lender sells the equipment for far less than you paid for it, and you and your business can be stuck owing the difference.
What Happens if The Repossessed Equipment’s Value Doesn’t Cover the Loan Balance?
This is often a worst-case scenario. We have worked with many businesses that bought equipment in good faith, believing they would profit and provide better service for their clients or customers. Between too much competition, results that don’t meet expectations, and obsolete equipment, yesterday’s shiny new equipment purchase can become today’s albatross, a debt that can crush your business. The equipment is worth less than the loan balance.
If you have a secured equipment loan and can’t make the payment, there are several possible outcomes, depending on the terms of your loan agreement and the lender’s policies.
These include your lender taking legal action against you, including wage garnishment or asset seizure. The lender can seize assets such as your savings account, tax refunds, real estate, car, or other possessions. Additionally, if your lender sues you, you can be held responsible not only for paying the loan balance but also for paying interest, fees, additional penalties, court costs, and attorney fees. In other words, it’s not just your business’s future on the line – it’s your financial well-being, too.
Other Penalties if You Can’t Make Your Equipment Loan Payment
You can be charged late fees and penalties. These fees can add up quickly and create even more debt.
Your interest rate may increase. Your loan agreement may allow your lender to use a default interest rate rather than a regular rate. Default interest rates are substantially higher,, which will make catching up on payments even more expensive.
Your credit score can go down, making it harder to get credit in the future.
Do Your Homework Before Signing a Personal Guarantee
It’s essential to do your homework before agreeing to a personal guarantee. Review the contract terms and determine the extent of personal liability if you fail to make payments.
Consider negotiating with the lender to see if they would be willing to have your business guarantee the loan without a personal guarantee. Exposing yourself to a personal guarantee is a high risk that should be avoided at all costs.
BransonLaw Can Help
If you’ve been oversold on the benefits of a certain piece of equipment, if there’s too much competition in your geographic region, or if your equipment is obsolete, bankruptcy may be your best option. Don’t keep paying thousands of dollars for equipment that isn’t making a profit.
Bankruptcy laws are complex and can vary depending on your business type and structure. Having a qualified, experienced attorney on your side is crucial to navigating the process.
Florida has a variety of bankruptcy exemptions related to personal bankruptcies. If your assets are worth less than what you owe, there are other legal options. For example, we can value equipment for its present value or return it to the lender in a bankruptcy proceeding. If a piece of equipment today is worth $20,000 but you owe $120,000, bankruptcy will allow you to “value” that equipment at the present value and allow you to pay back the “secured value” of $20,000 with interest over time in a plan of reorganization. Sometimes just giving the equipment back for the “indubitable equivalent” is the best option. This is where our firm comes in to see what is best for you and your business.
Call Us Today if You Are Considering Bankruptcy
Our team of experienced bankruptcy attorneys have assisted many businesses that found themselves upside down on equipment purchases. We have been able to assist businesses in discharging millions of dollars in Chapter 11, Subchapter V. BransonLaw is here to guide you through the bankruptcy process to help you protect your financial future and get your business back on its feet. By taking proactive steps now, you can ensure you have access to the debt relief you need. Don’t wait until it’s too late—start the process today to secure a more stable financial situation tomorrow.
We are located in Orlando, Florida, and handle bankruptcy cases throughout the State of Florida. Call us today if you live, own property, or operate a business in Florida and cannot manage your debt. Our goal is to help you understand your options.
Call today to discuss your business or personal guarantee with attorney Jeffrey S. Ainsworth. In 2020 when the Subchapter V law went into effect, he took the lead in assisting businesses in filing under this chapter. He is creative, thinks outside of the box, and fights for businesses to stay in business. This helps employees keep their jobs and is one of the key reasons he advocates for businesses. He believes that small businesses are the foundation of our economy and he and his team want to help you stay in business.