Equipment financing lenders, as well as banks, use the Five
Cs to evaluate loan applications: Character, Credit, Cash
Flow, Capacity and Collateral. However, while banks look at
small-to-medium size companies from a Fortune 500
perspective, equipment financing companies see applicants
from a small business perspective, which highlights a sixth
C: Common Sense.
Here is what a lending institution means when referring to
the Five Cs:
Character - Every lender wants to understand what type of
borrower an applicant will be in order to make smart, safe
credit-granting decisions. The longer a company has been in
operation, the more its payment history and outstanding
credit reveal management's attitude toward debt and making
timely payments. Public records and references can come
into play; still, the most reliable yardstick is the
character of a smaller company's owners. How they manage
their personal financial obligations is usually a reliable
indicator of the likelihood of their making timely
payments. The more closely held a company, the more
attention given the personal credit history of those in
charge and their prior business history. No matter how
solid a business plan appears and how reliable a company's
owners have been in the past, the realistic lender also
wants the assurance of personal guarantees from the
company's owners. This may take the form of a signature or
a pledge of cash or other collateral.
Credit - Business credit reports offer a quick glance at a
company's willingness to pay trade accounts on time, as
well as any derogatory public records, such as suits,
liens, or judgments that negatively affect a company's
credit rating. Such reports also show any UCC filings.
Potential equipment lenders are interested in the depth of
a business's borrowing history. The longer a company has
been in business, the easier it is for a lender to
determine credit stature; a good ten- or twenty-year credit
history obviously carries enormous weight. This places a
startup company less than two years old at a disadvantage.
So, when traditional data sources, such as Dun & Bradstreet
and Paynet cannot supply adequate information, the personal
credit histories of a company's owners become highly
important.
Cash Flow - Lenders want to see that any company applying
for a loan earns enough money to meet payroll, cover fixed
operating expenses, and comfortably make timely payments on
a new equipment loan or lease. While there are a number of
ways to define cash flow, lenders most often calculate the
cash flow available to repay new debt as net profit plus
such non-cash expenses as amortization and depreciation.
Capacity - Capacity is similar to a football team's depth
chart. The capacity to weather bad times is equally
important to a company seeking funds. Capacity acknowledges
that sometimes unforeseen things happen: a key employee
becomes unable to work; a major customer is lost; an
economic turn-down drastically reduces demand for product
or services. Any number of other unlikely - yet possible -
disruptions can negatively affect a company's cash flow.
And these disruptions can be temporary or permanent. So,
capacity measures a company's ability to pay off an
equipment loan or lease with cash reserves or its ability
to quickly convert real estate, stock, or other assets into
enough funds to cover debt.
Collateral - How much collateral, above and beyond the
equipment being financed, a company needs to secure a loan
or lease depends largely on the nature of the lender and
status of the business. A traditional bank often requires a
blanket lien on all assets of the business while an
equipment finance company normally uses only the equipment
for collateral. A few lenders also offer sale-leasebacks
and refinancing of existing equipment debt. This allows a
company to free up cash flow or lower their monthly payment
through equipment loans or leases.
Common Sense - Every decision to purchase and every
decision to grant financing must be based on common sense.
A lender needs to understand how additional equipment will
increase the company's stability and growth.
Notwithstanding the risk every lender takes and the gamble
every company makes when purchasing new equipment, for both
lender and borrower, the foundation of a decision to
finance equipment begins and ends with common sense.
----------------------------------------------------
Sean Marten is a Senior Credit Analyst at Crest Capital
http://www.crestcapital.com . Crest Capital's strength is
providing small & medium-sized businesses with the
equipment financing they need at better rates while
eliminating the hassle often encountered with typical bank
financing.
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