Yes. Many asset-based lenders add a machinery and equipment component to the facility, sized as a share of the equipment's appraised net orderly liquidation value. It usually takes the form of a term loan inside the facility that amortizes monthly, or a fixed-asset piece of the borrowing base that steps down on a schedule. The equipment is reappraised periodically. For an equipment-heavy company, this can replace a stack of separate equipment loans, each with its own lien, payment and lender, with one facility under one set of documents.
- Valued on
- Net orderly liquidation value, from an independent appraisal
- Advance
- A share of that value set by the lender, lower than on receivables
- Form
- An amortizing term tranche, or a fixed-asset line in the borrowing base that steps down
- Qualifies best
- General-purpose, movable machinery with an active resale market
- Rarely qualifies
- Custom, built-in or leased equipment; titled vehicles need extra steps
- Alternative
- Separate equipment loans or leases, each with its own lien
Two ways equipment enters the facility
A standard borrowing base counts receivables and inventory. Machinery and equipment, usually shortened to M&E, can be added in one of two ways, and the difference matters for how the money is used.
| M&E term loan | M&E in the borrowing base | |
|---|---|---|
| How it is funded | In full at closing, as a lump sum | As added availability, drawn through the revolver when needed |
| How it is repaid | Scheduled monthly principal payments | The M&E availability steps down each month; draws are repaid from collections |
| Interest | On the full term balance | Only on what is drawn |
| Re-borrowing | None; repaid principal is gone | Only up to the stepped-down amount |
| Best when | Cash is needed at closing: refinancing equipment debt or funding a purchase | The equipment is meant as a cushion under a fluctuating revolver |
Either way, the equipment adds borrowing capacity that receivables and inventory cannot provide on their own, and it sits under the same lien, the same reporting and the same agreement as the rest of the facility. Lenders commonly cap the M&E piece as a sublimit, so it cannot become the larger part of a facility built around working capital.
Which value the lender uses
Equipment has several values, and only one of them is the lender's. An independent appraiser, usually chosen by the lender and paid by the borrower, reports some or all of these:
| Value | What it assumes | Where it is used |
|---|---|---|
| Fair market value in continued use | The equipment stays installed in an operating business | Purchase price allocation, insurance; rarely for lending |
| Orderly liquidation value | Sold piece by piece over a reasonable period, with the seller finding buyers | The starting point for the lender's number, before costs are netted out |
| Net orderly liquidation value | Orderly liquidation value less the costs of removal, sale and commissions | The figure most asset-based lenders advance against |
| Forced liquidation value | A quick auction under pressure | Some lenders' basis for riskier files, and every lender's stress case |
What moves the appraised value is mostly outside the balance sheet: the age and condition of each machine, maintenance records, the make and how many buyers it has in the secondary market, how expensive it is to remove (foundations, rigging, special power), and where it sits. Equipment appraisals and net orderly liquidation value cover the definitions.
The number on your fixed-asset register is cost less depreciation. The number the lender lends on is what buyers at a liquidation would pay, less the cost of getting it out the door.
The appraisal is repeated, often yearly and more often if availability runs low or the business weakens. A reappraisal can lower availability as well as raise it, so a business relying on its M&E tranche should maintain its equipment and its maintenance records with the next appraisal in mind.
Amortization: why the equipment piece shrinks
Equipment loses value as it ages. The lender therefore recovers its M&E advance faster than the collateral wears out, usually on a schedule tied to the equipment's remaining useful life and often shorter than the facility itself. Receivables turn over and renew themselves every month; a lathe does not.
Suppose an appraisal puts net orderly liquidation value at 3,000 and the lender advances 2,100 against it, amortizing over sixty months at 35 a month. The M&E piece falls by 420 a year:
| Point in time | M&E balance or availability | Change |
|---|---|---|
| Closing | 2,100 | |
| End of year one | 1,680 | Down 420 |
| End of year two | 1,260 | Down 420 |
| End of year three | 840 | Down 420 |
| End of year four | 420 | Down 420 |
| End of year five | 0 | Fully repaid |
Two negotiable features change the picture. A re-advance or reload lets the M&E piece be topped up after a new appraisal, or when the business buys new equipment, instead of simply running down. An accordion or capital expenditure line serves a similar purpose for planned purchases. Without either, the facility's total availability falls every month even if the business is growing, and a borrower who counted the M&E piece as permanent will find the revolver tighter each year.
What equipment counts
Lenders favor equipment that can be removed, moved and sold to many buyers. Typical treatment:
- Usually eligible: general-purpose machine tools, CNC machining centers, fabrication and welding equipment, forklifts and material handling, printing presses, and standard construction equipment with an active resale market.
- Case by case: trucks, trailers and other titled vehicles, which need the lender's lien noted on each title; equipment at a customer's or contractor's site; production lines built for one product.
- Usually excluded: equipment already financed under a purchase-money security interest or a lease; fixtures built into real estate; tooling and molds owned by customers; software; equipment in a leased building without a landlord waiver, which a lender will either exclude or cover with a rent reserve.
Leased equipment is a common surprise. A fair market value lease leaves the lessor as the owner, so the equipment is not yours to pledge; a lease with a nominal buyout may be treated as a financing with the lessor holding a lien. FMV versus dollar buyout leases explains the distinction. Equipment already carrying another lender's lien can join the M&E tranche only if that loan is paid off at closing, which is a common use of the tranche.
An M&E tranche versus stacking equipment loans
Equipment-heavy businesses often accumulate a separate loan or lease for each major purchase over the years. Each one takes its own lien on its own machine, has its own payment date and its own terms, and has to be carved out of the main lender's collateral. Folding them into an M&E tranche changes the picture.
| M&E tranche inside the ABL | Separate equipment loans or leases | |
|---|---|---|
| Liens | One lender, one lien across the business | A purchase-money lien per loan, carved out of the main lender's collateral |
| Payments | One monthly amortization | A payment per loan, on different dates and terms |
| Advance basis | A share of the liquidation value of equipment already owned | The cost of new equipment being bought |
| What it funds best | Unlocking value in equipment already paid for, or refinancing existing equipment debt | New purchases, one at a time, often with long terms |
| Covenants and defaults | One agreement | Separate agreements, linked by cross-default clauses |
| Refinancing later | One payoff | Several payoffs, UCC-3 filings and lien releases |
Separate equipment financing still wins in one clear case: buying new equipment. Equipment lenders and lessors lend against the purchase price, often for most of it and over the machine's useful life, while an asset-based lender advances only a share of liquidation value, which for new equipment sits well below cost. Many businesses use both: the M&E tranche for the fleet they own, equipment loans for new purchases, with the credit agreement allowing purchase-money debt up to an agreed limit. Equipment loans alongside senior debt and the UCC blanket lien cover how those carve-outs are drafted.
Consolidate the equipment you own into the facility; finance the equipment you are buying where the lender advances on cost.
Where an M&E tranche fits
The businesses that use M&E tranches most are those whose balance sheets hold as much value in equipment as in receivables: manufacturers and machine shops, printing and packaging companies, trucking companies and equipment service firms. It is also a common tool in a refinancing that clears out several equipment lenders at once; see refinancing equipment loans.
Where the equipment is substantial and there is also real estate, the business may do better with a separate term lender holding first lien on the fixed assets and an asset-based lender on working capital, as described in how an ABL and a term loan split collateral. For long-life equipment bought for the business's own use, SBA programs are another route; equipment financing versus SBA 7(a) compares them.
To prepare, assemble a fixed-asset list with make, model, serial number, year and location for each significant machine; maintenance records; the lease and loan documents for anything financed; and a UCC search showing existing liens. Add these to the line-of-credit file the lender needs anyway: receivables and payables agings, balance sheet, profit and loss, year-to-date results, the debt schedule and, where relevant, an inventory report.
Not every asset-based lender adds equipment, and those that do differ widely on advance, amortization and re-advance terms. Transparent's book holds 235 lenders that write asset-based loans and lines and 244 that write equipment, which lets an M&E tranche be tested against separate equipment financing on the same file, with the appraisal and the model showing what each route actually provides.
Common questions
- Can I borrow against equipment I already own outright?
- Yes. That is the main use of an M&E tranche: turning paid-off equipment into borrowing capacity inside the asset-based facility, based on its appraised liquidation value.
- How often is the equipment reappraised?
- As the agreement sets, often yearly, and more often if availability runs low or results weaken. A new appraisal can lower the M&E availability as well as raise it.
- Does leased equipment count?
- Not under a fair market value lease, because the lessor owns it. Equipment under a lease with a nominal buyout is usually treated as financed, with the lessor holding a lien, and counts only if that financing is paid off.
- Will an asset-based lender take trucks and trailers?
- Some will, with the lender's lien noted on each vehicle title. Others exclude titled vehicles or leave them to specialist equipment lenders.
- What happens if I sell a machine that is in the tranche?
- The proceeds usually go to pay down the M&E piece, and the lender releases its lien on that machine. Agreements normally allow routine disposals of worn-out equipment within set limits.
- Can the M&E piece grow when I buy new equipment?
- Only if the agreement includes a re-advance or capital expenditure feature. Without one, the tranche only amortizes, and new equipment is usually financed separately.