Lenders financing against plant and machinery as security take a materially different view of value than what appears on a balance sheet or in a standard replacement cost valuation — understanding that gap matters for both borrowers and the valuers preparing security valuations.
Why lenders discount plant and machinery heavily as security
- Removal and relocation cost. Equipment integrated into a facility often requires significant cost to de-install and relocate before it can be sold to a new buyer.
- Thin secondary markets. Specialised equipment frequently has limited buyer pools — a forced sale scenario compresses this pool further.
- Rapid technological obsolescence. Equipment value can decline faster than real estate, meaning security value assessed at origination may deteriorate faster than the loan amortises.
- Condition deterioration risk. Idle or improperly maintained equipment during enforcement/insolvency can deteriorate quickly compared to real estate.
What lenders actually want in a valuation
Lenders assessing plant and machinery security typically require forced sale value, not market value or replacement cost — reflecting realistic recovery under a compressed enforcement timeline, net of removal, transport, and remarketing costs the lender would actually incur.
Loan-to-value implications
Because of the risk factors above, lenders typically apply materially lower loan-to-value ratios against plant and machinery security compared to real estate — and may require the valuation to be refreshed more frequently given faster potential value deterioration, particularly for technology-sensitive equipment categories.
What borrowers should understand
If plant and machinery forms part of your loan security package, expect the lender's valuation requirement to focus on realistic forced sale recovery rather than the asset's book value, insured replacement cost, or even standard market value — understanding which figure the lender is actually underwriting against helps set realistic expectations for facility sizing and covenant structuring.