INTM579020 - Thin capitalisation: lending against asset values: Lending against tangible assets - assets other than buildings and land

In general, tangible assets other than buildings and land are not highly valued by third-party lenders. To understand this one needs to consider what would happen in the event of default on a loan. The lender would take possession of the assets used as security, and have to dispose of them. It is unlikely, therefore, that the lender will attach anything like the value these assets would have represented at the time of lending, as an integral part of a viable business.

Plant and machinery is generally of poor security value, particularly if it is specialised. Motor vehicles belonging to a car leasing or hiring company may have some value, but one only needs to attend a car auction of any size to appreciate that they generally sell for prices significantly less than the ‘book’ values of the trade magazines. Future market and price are unpredictable, as the car leasing industry has learnt several times in the last few years, resulting in very conservative values. Furniture, fixtures and fittings are rarely regarded as being of much value.

A lender will generally take into account the realisable value of assets, bearing in mind such factors as the condition and likely market. Generally, a creditor may well lump all assets together and make a judgement on their net worth.

A borrower will be able to raise money on future receivable income, by debt factoring i.e. selling rights to future income in return for immediate cash. The receivables will be sold at a discount, so that the factor can make a return by recouping a greater amount than has been advanced.

Any contention that assets of a company may be used as security for a loan from a connected party, and perhaps increase to the amount of the loan, needs to be looked at closely. As a general rule, one needs to look at the whole package when considering lending against assets, but it is for the borrower to make the case.