How lenders value business assets

Why lending value differs from book value

Accounting book value reflects historic cost less depreciation, which has little bearing on what a lender would recover if it had to sell an asset in a forced or orderly sale. Lenders instead work from an independent valuation, or in the case of receivables and stock, from an approved and discounted proportion of the reported figure, because they need a realistic estimate of recoverable value under stress, not a figure derived from an accounting policy.

This gap surprises many business owners, particularly around equipment and stock, where a machine carried on the books at a low written down value might actually be worth more on the open market, or conversely where fast moving stock carried at cost might be worth far less once a forced sale discount is applied.

Property valuation

Commercial property is valued by a RICS qualified surveyor, usually on the basis of market value, which assumes a reasonable marketing period, or in some cases forced sale value, which assumes a shorter and more urgent disposal. Lenders then apply a loan to value cap to that figure, typically 60% to 75% for standard commercial property, lower for specialist or single use buildings that would be harder to re-let or resell, and higher in some cases for strong covenant, well let investment property.

It is worth commissioning your own indicative valuation before approaching lenders on a property backed request, since a wildly optimistic assumption about property value is one of the most common reasons a term sheet gets revised downward late in the process.

Plant, equipment and vehicles

Asset finance and asset based lenders typically value plant, equipment and vehicles at forced sale value, which is a discounted estimate of what the asset would achieve at short notice through an auction or trade sale, rather than its replacement cost or even its fair market value in a normal sale process. This is why lenders often advance a lower percentage against specialist or bespoke equipment, which has a thinner resale market, than against standard vehicles, generators or general purpose machinery that have an active secondary market.

Age and remaining useful life matter considerably too. A lender will typically ensure the loan term does not extend meaningfully beyond the asset's realistic remaining working life, since an asset with little useful life left provides weak security regardless of its notional value.

Stock and inventory

Stock is one of the hardest assets to value for lending purposes because its worth depends heavily on how quickly and at what price it could actually be sold if the business failed. Lenders typically apply a significant discount to the cost value of stock reported in management accounts, and reserve lending against stock at all for businesses with fast moving, readily resaleable goods rather than slow moving, bespoke or perishable inventory.

Facilities that include a stock element, often as part of a broader asset based lending package, usually require periodic independent stock audits to confirm quantities and condition, since self reported stock figures are treated with caution.

Debtors and receivables

Trade debtors are valued for lending purposes based on an approved ledger, which excludes concentrations with a single customer beyond a set percentage, invoices older than typically 90 days, disputed balances, and connected party invoices. What remains after these exclusions is the approved debt against which an advance rate, typically 80% to 90%, is applied. A business with a large, well spread and prompt paying customer base will therefore secure a materially larger facility against the same headline turnover figure than one with concentrated or slow paying customers.