How Equipment Financing Credit Decisions Are Made

There are many equipment financing companies to choose from throughout the US and Canada. They all have similar but not necessarily the exact same way of looking at borrowers. They range from credit focused,  challenged credit, collateral driven, start-ups and even those that specialize in municipal equipment buyers. Whatever their niche, they generally look to these 5 credit measures in common to make yes/no credit decisions:

  1. Cash Flow – All lenders want to make sure that you can make the payments for the life of the financing term. As a rule of thumb, 3 times the payment amount should be your average bank balance or average daily balance.  
  2. Personal Credit (P/C) – Good personal credit will put you into the game of getting approved at flexible payment terms and lower financing cost. However, if you have a bad Paynet score, your deal may go down the tubes or you will have a very high cost of funds if you can even get a deal. The moral of the story is pay your business and personal debts to be considered a good credit risk.
  3. Comparable Business Debt (AKA “comp debt”) – As quick as good personal credit got you into the game, bad business credit will take you out!  Here’s why. A bad Paynet score ( business credit reporting) will demonstrate to lenders that you do not pay your business debts as good as your personal debt.  If you are a start-up you will get start-up pricing from a lender that specializes in start-up (i.e. high teens+). Credit based lenders will say, yes he/she has great personal credit, but it is easier to walk away from business debt than a home loan. It took time to build personal credit; it will be the same for business debt.  Or if you have been in business beyond start-up stage and have never borrowed for your business, like start-ups, lenders will have no payment history. If approved, it will likely be from a “B/C or start-up lender. So don’t walk away with a bruised ego from needed financing because you think you should get that low mortgage like rate. Ask yourself, what is the best prudent business decision, pay cash, don’t buy at all or finance the equipment to conserve cash for operations and build business credit?
  4. Collateral – Some lenders look more toward collateral such as heavy equipment and trucks as opposed to personal/business credit.  Cash flow will always matter even with “collateral lenders”. Some lenders will not want to touch soft collateral or collateral that would be hard to repose. These lenders will be mainly credit focused or charge higher cost of funds to take additional risk associated to weaker collateral.
  5. Time in Business - How long have you been in business?  The SBA states that 30% of new businesses fail during the first two years of being open, 50% during the first five years and 66% during the first 10. Most “A” lenders do not offer equipment financing to businesses less three years old. Even if you have a 700+ personal credit score, they are looking at the business failure premium to be paid for the additional risk. If you’ve owned a business in the past, communicate it to your financing company. You may be able to get around start-up financing and demonstrate comp debt from the previous business. Sometimes if you add more color to the  picture, you’ll find that you can close the financing that best fits your needs.

Understanding these 5 points will help you increase your odds of securing the equipment financing you need to grow your business.

About the author:

Julius Talley has been a turnaround CFO and commercial capital advisor since 1995. He has guided companies back to financial health with corrective strategies and increased access to capital. Additionally Julius has worked with equipment buyers and sellers conduct more business via his network of lenders and ability to structure loans for approval. Julius can be reached at jtalley@jamescap.com.

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