In equipment finance, lenders often face periods where leased or financed assets become non-performing — meaning the borrower stops making payments, and the funded equipment sits idle. These non-performing assets (NPAs) damage balance sheets, tie up liquidity, and reduce profitability.
Today, we’ll discuss how lenders can use short-term liquidity solutions to quickly clear NPAs, free up capital, and restore lending momentum.
Understanding the Collateral Gap
The collateral gap is the difference between:
- The value of the financed equipment (often falling over time), and
- The loan balance owed by the borrower.
When equipment depreciates faster than expected or the borrower defaults, a gap opens — leaving the lender with an asset worth less than the outstanding debt. This makes resale or recovery harder, especially in specialized equipment markets.
Why Clearing NPAs Matters
Non-performing assets hurt lenders by:
- Locking up capital that could be deployed into new loans
- Increasing risk-weighted assets and regulatory capital requirements
- Reducing earnings due to higher provisioning and write-offs
- Damaging credit ratings and investor confidence
Clearing NPAs quickly and efficiently strengthens liquidity and improves financial performance. In fact, many lenders underestimate the hidden costs of carrying aged B2B debt, which include not just lost interest, but significant regulatory drag and internal resource depletion.
Short-Term Liquidity Solutions Explained
Short-term liquidity solutions are financial tools that help lenders convert NPAs into cash or near-cash quickly. These solutions bridge the time and value gap between an asset becoming non-performing and its ultimate recovery or sale.
Key short-term liquidity solutions include:
Asset-Backed Securities (ABS) or Securitization
Lenders package performing and non-performing leases into a pool and sell interests to investors.
- Benefits:
- Immediate cash inflow
- Transfers risk to investors
- How it works:
- Pool similar equipment loans
- Structure tranches based on risk
- Sell to institutional investors
Best for: Lenders with large volumes of similar contracts.
Short-Term Loan Sales
Selling non-performing portfolios at a discount to specialized buyers.
- Benefits:
- Quick removal of NPAs from the balance sheet
- Immediate liquidity
- Considerations:
- The sale price may be lower than the book value
- Choosing reputable buyers is key
Best for: Smaller lenders or portfolios with diverse equipment types.
Workout Financing
Providing a new, short-term loan to the borrower to restructure the debt and avoid repossession.
- Benefits:
- Preserves customer relationship
- Potential recovery of the full amount
- Risks:
- Requires careful credit assessment
- May not work for all cases
Best for: Strategic customers with temporary payment issues.
Bridge Loans Against Repossessed Equipment
Financing secured by repossessed equipment to cover costs until the equipment is resold.
- Benefits:
- Cover storage, refurbishment, and remarketing costs
- Improves recovery value
- How it works:
- The lender or third party provides a short-term loan
- Equipment is refurbished/sold
- Proceeds repay the bridge loan
Best for: High-value equipment with strong resale markets.
Collateral Enhancement and Guarantees
Using third-party guarantees, insurance, or credit enhancement facilities.
- Benefits:
- Reduces lender exposure
- Improves pricing for potential buyers
- Examples:
- Guarantees from export credit agencies
- Insurance against default
Best for: Cross-border transactions or high-risk sectors.
Choosing the Right Liquidity Solution
When selecting a strategy, lenders must ensure their portfolio matches the specific ‘Buy Box’ of institutional partners. Specialized firms can help lenders explore buyer opportunities that align with your specific equipment types and risk appetite. To select the best option, lenders should evaluate:
| Criteria | What to Consider |
| Size of NPA portfolio | Larger portfolios may suit securitization |
| Type of equipment | Standardized equipment sells more easily |
| Market conditions | Strong resale markets improve outcomes |
| Regulatory constraints | Some jurisdictions limit NPA sales |
| Cost of solution | Balance speed vs. discount on sale |
Step-by-Step Implementation Guide
Step 1: Identify and Classify NPAs
- Segment by equipment type, age, location, and residual value.
Step 2: Assess Market Value
- Utilize industry appraisers to determine the fair resale value.
- Adjust for refurbishment or transport costs.
A key part of this phase is streamlining due diligence, ensuring that all documentation is audit-ready to prevent delays during the sale process.
Step 3: Estimate Collateral Gap
- Compare the loan balance to the estimated liquidation value.
- Identify where liquidity solutions are needed.
Step 4: Select a Liquidity Strategy
Select one or combine several options based on your risk tolerance and portfolio size.
Step 5: Engage Partners
- Connect with ABS investors, loan buyers, or credit enhancement providers.
- Set clear legal and pricing terms.
Step 6: Execute and Monitor
- Complete transactions
- Track cash flows and recovery performance
- Adjust strategy as market conditions change
Legal and Regulatory Considerations
Lenders must ensure:
- Compliance with accounting standards (e.g., IFRS 9 / CECL)
- Proper disclosure of asset sales or securitization
- Clear titles for repossessed equipment
- Proper data privacy and consent when selling contracts
Consult legal counsel early in the process to avoid compliance gaps.
Best Practices for Long-Term Health
To reduce future NPAs:
- Use predictive analytics to spot early payment issues
- Price loans to reflect residual value risk
- Maintain regular equipment valuations
- Strengthen customer underwriting
- Offer proactive restructuring options
To maintain a healthy portfolio, lenders should adopt a standardized approach to asset recovery. Following The Golden River Global Advantage provides a roadmap for using UCC-certified audits to de-risk portfolios before issues arise.
Conclusion
Short-term liquidity solutions help equipment finance lenders:
- Convert non-performing assets into cash
- Close the collateral gap
- Free up capital for new originations
- Improve financial flexibility
By understanding the tools available and choosing the right solution for each portfolio segment, lenders can manage risk and maintain a strong, liquid balance sheet even in challenging markets.
– By the Golden River Global Research Team
