What is one thing that ALL Lenders Like To See When Reviewing Your Equipment Loan Application?

When it’s time to buy that new equipment, many business owners find themselves turning to their bank for financing.  But, as many entrepreneurs have come to learn, most banks are more interested in borrowers with 750 FICO scores, 5 years in business and a super healthy cash flow (with lots of money left in account balances at the end of the month).

That rules out a good number of would-be solid borrowers who are good credit risks, but fall just short of bank requirements.  So, when going to an alternative finance company or private bank, what other factors that can help you get that approval?

There are too many to list in this short text, but one thing all finance companies like to see is previous loan activity; more specifically term loans that were eventually paid off.

If you’ve never borrowed money for equipment in the past, bankers tend to get nervous even if you have a FICO score of 800.  Let’s assume you always purchased your equipment with cash. Perhaps that made sense at the time; but if you’ve never felt the crunch of making a $2,000 per month payment for a semi truck or restaurant refrigeration unit, that could be a strike against you. 

Too often we see applicants with excellent credit get turned down by the top banks because their FICO score was based on $2,500-$10,000 credit history with VISA, Target, Sears or American Express. Good history with revolving credit lines can help, and of course paying any debt on time helps your credit score; but those types of credit lines pale in comparison to being able to demonstrate that you successfully paid off a $75,000 equipment loan balance over 4 to 5 years, and in a timely manner. When Equipment Lenders and Banks can see that you have financed and paid off equipment, they view you as a seasoned businessperson who was able to MAKE MONEY with the money they borrowed.

If you’ve borrowed money for equipment, make sure you get ‘credit’ for being punctual with payments and payoffs.  Some equipment lenders don’t report your payment history, so you may have to request a letter from your previous bank or finance company, so that your new lender can get that off their checklist.

That small thing may be the tipping point to your approval, so don’t overlook it since it’s something ALL equipment lenders like to see.

Should I buy or should I rent my commercial space? Your tax adviser can help.

After recently reviewing several applications for real estate purchase, I discovered that it did not make sense for two of our clients to purchase their commercial real estate at this time.  This was slightly painful, considering that we actually earn money by financing business purchases.

I personally believe it only makes sense to own property when you can generate income by doing so.  Unless you are a commercial real estate investor, your property is not an active income generator; your business activities (getting and keeping customers) are your active income generator!

Commercial property is just another business tool.  And, as with all business tools, you should conduct an careful cost/benefit analysis before investing your hard earned cash.  For this reason there are more medical clinics, wholesale companies, restaurants and tech firms opting to lease instead of purchase the property in which they conduct business.

CALL YOUR TAX PROFESSIONAL FOR HELP

Far too many business owners only think about taxes once a year.  This is one the biggest mistakes an entrepreneur can make during the life of his business.

If you are considering purchasing the property that you currently rent, or another property you have your eye on, here’s the right way to decide:  Schedule a meeting with your accountant and pay for 2 mock tax comparisons; 1 that shows what your tax bill would be if you keep renting your commercial space; the other showing what your tax bill would be if you purchase the property.  Then ask her to stretch it out over a 5-7 year period.  You’ll have to make certain assumptions; it can’t be exact since nobody knows what you will earn each year for the next 5-7 years but don’t worry, your tax professional will know how to forecast each scenario.

Once it’s done you can see in black and white if it makes sense to buy that commercial property, or keep renting and invest the difference in your business or retirement plan.

Monthly rent payments on office, warehouse, manufacturing facility, etc. are fully tax deductible.  When purchasing property certain principal payments, acquisition costs and fees are not tax deductible, so make sure you are crystal clear on what the real, after-tax costs and benefits will be.

Similar to buying a residential property, the real economic benefit is usually enjoyed only when the property is sold; and that presupposes that you can sell for an attractive ‘after-tax’ profit.   Your tax adviser will have software that will help you make the best decision based on your unique situation and your business exit strategy.

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Do transportation companies need a special type of financing?

Yes, and now more than ever. There are transport companies for furniture & appliances, automobiles and heavy equipment, refrigerated foods, livestock, local tow truck equipment and so on.

Trucking has become much more segmented over the past few decades and so has financing for the trucking industry.   That separation has it more complex for transporters to find the best financing programs for their specific needs.

Many trucking companies assume that their local bank is the best option for their equipment loan.  BizLoan1 Capital works with dozens of banks, and sometimes bank financing is the right choice.  However, we are seeing more banks that are narrowing the type of equipment they will finance and/or placing restrictions on certain trucking activities.  For example, there is a growing list of banks that will no longer finance  auto transporters, or trucks with sleeper cabs (OTR transporters).  

In addition to searching for the lowest rates and best terms, transporters have the challenge of finding the best finance terms for the specific trailers they need(automobiles, horses, hazardous materials, etc.).

As a business owner, you want to save time and go straight to the companies who understand your unique equipment and financing needs.  Before we place a customer’s application with a bank, vs. a transportation equipment finance lender, two of the first questions we ask is “what do you transport and how far do you ship from your office address?”. This simple answer could save you days or weeks in securing the right loan with the right lender.

Some banks and finance companies may no longer finance the equipment you’re hoping to purchase because they’ve had bad experience in certain sectors or equipment types.

So, before you apply for that sleeper cab or 7-car Cottrell trailer, make sure your bank or finance company has your desired equipment on their approved list.  Otherwise, you could find yourself waiting several days only to discover you need to apply elsewhere.

It’s not the loan officer’s fault.  As we mentioned, the industry has become gigantic, and smart banks and lenders are constantly evaluating and changing guidelines so that they lend money to the companies they understand and feel comfortable with.

If you have weeks to research the thousands of lending options available you should explore them, but make sure the potential lender

The bottom line is that the more your lender truly understands your industry and your equipment, the better that is for you.  That understanding can help with terms, lower rates and speed of approval.  By doing the legwork ahead of time you’ll avoid the runaround because your lender will know in minutes whether or not they’re willing to cut a check for that equipment you’ve been shopping for.  A lender who understands your specific business can also be beneficial when times get lean.  Certain industry-specific expert lenders will actually take the time to work with you when business gets slow. This could come in handy when you need a few extra weeks (or more) to get cash flow back on track.

Happy shopping!

BizLoan1 Capital