INTM518020 - Thin capitalisation: practical guidance: 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 regarded by third party lenders. This is not difficult to understand. In the event of default on debt, the lender takes possession of the assets which had served as security, and the lender then has to dispose of them. In these circumstances, it is unlikely the lender will be able to obtain the value these assets would have held at the time of lending when they were part of a viable business. This inevitable decline in asset value is usually factored into prudent third-party lending.

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

A borrower will be able to raise money on future receivable income, by debt factoring, that is, 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 profit.

Any contention that assets of a company may be used as security for debt from a connected party in order to justify an increase in the amount of the debt, needs to be looked at closely. As a general rule, one needs to look at the whole package when considering lending against assets, and it is for the non-arm’s length borrower to make the case.