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by Tom Williams
The credit crunch is impacting more than just the housing market. Small businesses will begin to face increased requirements when attempting to acquire financing. Most lenders in the equipment leasing space have watched their bad debt and delinquencies more than double in the last 18 months. To make the situation worse, entrepreneurs are feeling the pinch of the equity in their homes evaporating. With this background, it is easy to see so you can imagine why lenders are taking a closer look at which businesses they finance. In turbulent times, entrepreneurs can fall back on the equity in their home to weather tougher months but over the last 18 months that safety net has diminished.
There are a few more hurdles companies looking for equipment leasing for their business may have to jump over in order to achieve their goal of financing their business equipment. Here are some steps every business should consider when applying for equipment leasing or financing.
Step 1: Know what you need and what you want.
Needing and wanting are two separate things. Decide what equipment is essential to grow your business. Create your budget for the entire year. Know exactly what your business needs and when. It is not always easy to forecast equipment needs, however if you can get a good idea of equipment cost +/- 15% for the year you will be in good shape. This is a necessary first step because you don’t want to make a payment on equipment you don’t need. Most entrepreneurs do not have a capital budget and usually decide to purchase equipment as a knee jerk reaction to demand so a budget will allow you to look at the needs of your business on an annual basis.
Step 2: Know where you stand as a business
It is absolutely essential that you have access and understanding of how your company appears to lenders. Your Dun & Bradstreet (D&B) report is essentially like a personal credit bureau for your business. Although D&B may have some inaccurate information, it is one of the most important data sources a leasing company reviews when deciding to approve or decline your application.
Go to D&B, at www.dnb.com, and request a copy of your report and review it thoroughly. The key information lenders evaluate from the report is time in business, correct ownership, lawsuits, liens, and the company Paydex. Paydex is a score that tells the lender how your company is paying its bills compared to other similar businesses in your industry. Companies with a Paydex score under 50 will have a very hard time attaining financing. The score is designed to give lenders a decent likelihood of how responsibly you will pay them which you can imagine is important in their decisions to loan your business money. If there is any discrepancy on your report from what you know of your payment schedules, call D & B and do your best to update them immediately.
Paynet, www.paynetonline.com,is the new kid on the block for business reports. It is a service larger leasing companies and banks utilizes to report who is paying and who is not. Paynet is very accurate and tells other lenders how much customers have borrowed, when, and how promptly bills are paid. If you have negative information on Paynet, you will have a challenging time getting financing. Paynet allows you to obtain a free report as well by emailing support@paynetonline.com. This is great information for you to review and like the D&B report, make sure you clear up any inaccuracies.
Step 3: Know where you stand as a consumer
There has long been debate about the connection between personal credit and business credit. At least 90% of all lease obligations have a Personal Guaranty, which means the business owners and the business entity enter the agreement together. Leasing companies believe that if business owners do not pay their personal bills on time they are unlikely to pay their business bills on time. The rule of thumb is that personal needs will outweigh business needs. If business owners are not paying essential personal bills like rent or mortgage, phone, electric or car payments leasing companies see that as a signal of bigger cash flow issues that will inevitably impact the business ability to pay its bills.
Conversations with entrepreneurs suggest that many, if not most, entrepreneurs sacrifice their personal credit to make their company stronger. However, right or wrong, the personal credit of stockholders will play the largest part in determining if a company is financed. Most lenders are looking for personal credit scores of the owners of the company to be in the mid 650’s and most leasing companies have a hard cut off at 620. There are lenders who work with scores under 620 but the monthly payments on the lease will be higher to offset the risk of the leasing company. Lenders also look at whether owners have adjusted their mortgages and at how much debt is held on personal credit cards. Regardless of your credit score, it is imperative you know your personal score and what is driving your score downward. This information will allow you to have a real interaction with your leasing company and speak the same language which will increase the chance that your company will receive financing.
Step 4: Initiate contact with leasing companies.
The best way to make contact with a leasing company is a referral from a current customer or vendor that has an existing relationship. This is helpful because you can get first hand feedback about what it is like to work with the leasing company. Additionally, leasing companies will feel more comfortable with you and might take extra steps to insure your application is approved if you are connected to one of their existing customers. If you don’t know of any leasing companies, ask one of the vendors you are getting quotes for equipment from if they work with a leasing company. Over 90% of the time equipment vendors will have an excellent relationship with a lender they can leverage.
The last source for equipment leasing companies is the Internet. I would suggest going to organic listings and not pay for click listings. The pay per click listings tend to be small equipment leasing brokers that don’t fund their own transactions. Make sure all the companies you consider are members of UAEL, ELFA, or NAELB. Request literature and information on a few leasing companies and pick three you like but do not apply with any of them yet.
Step 5: Pick one company to apply with
Apply with one leasing company. By now you know what you are buying, your business credit scores, and your personal credit scores. Leasing companies have a tremendous amount of information to provide you with a very accurate quote. Don’t be too concerned about the lowest payment. You should focus on how easy it is to work with the leasing company, late fees in the contract, and how often the leasing company will have to pull your credit. Most lenders do a credit inquiry after 90 days if you are looking to add more equipment. Other lenders pull your credit regardless of when it was last checked. Some leasing companies also only have a 3-day grace period that will almost guarantee a late fee that is typically 10%. If you choose a larger lender you might find you are stuck with offshore customer service and diminished decision making once you are in their system. Ease of use and availability are very important. Most companies should be very close in the terms they offer so try to understand who you like working with and pay attention to how friendly the terms of the contract are.
Step 6: Get approved
Now you are ready to apply for the financing with the lender you have chosen. The approval process can take anywhere from a couple of hours to a few days depending on the amount of your request. Once you have an approval, evaluate all the terms. It is extremely important to match the equipment payment to your cash flow. If you are buying equipment with a long useful life, such as a large commercial printer, it might be the best decision to select a longer term such as 60 months. For equipment with a shorter lifecycle, like computers, 36 month leases are advisable. Most leasing companies also have deferral payments that can offer huge savings on cash flow until you get the equipment running and making your business money. Most companies will offer no payments for 90 days or even 180 days. That extra time that can make a huge difference for smaller companies.
Step 7: Understand the payments and term
Some entrepreneurs get so excited about the new contract they just closed that they jump headfirst into a lease for new equipment. Understand that if business falls through, you must have a contingency plan. There is nothing worse than making a payment for equipment you no longer need and/or cannot afford. Review all the terms on the lease, make sure you know your options and understand the contract. Most companies will allow minor changes to reflect your businesses needs.
Step 8: Have fun
You never thought equipment leasing could be fun did you? Think of it this way, a leasing company can help you maximize cash flow and increase profits. Think of a leasing company as a silent partner who doesn’t tell you how to run your business. Maximize your capital. Enjoy your dreams and your business, but please plan for you, your business, and your lenders. It will play a huge role as you continue to grow.
The credit crunch is impacting more than just the housing market. Small businesses will begin to face increased requirements when attempting to acquire financing. Most lenders in the equipment leasing space have watched their bad debt and delinquencies more than double in the last 18 months. To make the situation worse, entrepreneurs are feeling the pinch of the equity in their homes evaporating. With this background, it is easy to see so you can imagine why lenders are taking a closer look at which businesses they finance. In turbulent times, entrepreneurs can fall back on the equity in their home to weather tougher months but over the last 18 months that safety net has diminished.
There are a few more hurdles companies looking for equipment leasing for their business may have to jump over in order to achieve their goal of financing their business equipment. Here are some steps every business should consider when applying for equipment leasing or financing.
Step 1: Know what you need and what you want.
Needing and wanting are two separate things. Decide what equipment is essential to grow your business. Create your budget for the entire year. Know exactly what your business needs and when. It is not always easy to forecast equipment needs, however if you can get a good idea of equipment cost +/- 15% for the year you will be in good shape. This is a necessary first step because you don’t want to make a payment on equipment you don’t need. Most entrepreneurs do not have a capital budget and usually decide to purchase equipment as a knee jerk reaction to demand so a budget will allow you to look at the needs of your business on an annual basis.
Step 2: Know where you stand as a business
It is absolutely essential that you have access and understanding of how your company appears to lenders. Your Dun & Bradstreet (D&B) report is essentially like a personal credit bureau for your business. Although D&B may have some inaccurate information, it is one of the most important data sources a leasing company reviews when deciding to approve or decline your application.
Go to D&B, at www.dnb.com, and request a copy of your report and review it thoroughly. The key information lenders evaluate from the report is time in business, correct ownership, lawsuits, liens, and the company Paydex. Paydex is a score that tells the lender how your company is paying its bills compared to other similar businesses in your industry. Companies with a Paydex score under 50 will have a very hard time attaining financing. The score is designed to give lenders a decent likelihood of how responsibly you will pay them which you can imagine is important in their decisions to loan your business money. If there is any discrepancy on your report from what you know of your payment schedules, call D & B and do your best to update them immediately.
Paynet, www.paynetonline.com,is the new kid on the block for business reports. It is a service larger leasing companies and banks utilizes to report who is paying and who is not. Paynet is very accurate and tells other lenders how much customers have borrowed, when, and how promptly bills are paid. If you have negative information on Paynet, you will have a challenging time getting financing. Paynet allows you to obtain a free report as well by emailing support@paynetonline.com. This is great information for you to review and like the D&B report, make sure you clear up any inaccuracies.
Step 3: Know where you stand as a consumer
There has long been debate about the connection between personal credit and business credit. At least 90% of all lease obligations have a Personal Guaranty, which means the business owners and the business entity enter the agreement together. Leasing companies believe that if business owners do not pay their personal bills on time they are unlikely to pay their business bills on time. The rule of thumb is that personal needs will outweigh business needs. If business owners are not paying essential personal bills like rent or mortgage, phone, electric or car payments leasing companies see that as a signal of bigger cash flow issues that will inevitably impact the business ability to pay its bills.
Conversations with entrepreneurs suggest that many, if not most, entrepreneurs sacrifice their personal credit to make their company stronger. However, right or wrong, the personal credit of stockholders will play the largest part in determining if a company is financed. Most lenders are looking for personal credit scores of the owners of the company to be in the mid 650’s and most leasing companies have a hard cut off at 620. There are lenders who work with scores under 620 but the monthly payments on the lease will be higher to offset the risk of the leasing company. Lenders also look at whether owners have adjusted their mortgages and at how much debt is held on personal credit cards. Regardless of your credit score, it is imperative you know your personal score and what is driving your score downward. This information will allow you to have a real interaction with your leasing company and speak the same language which will increase the chance that your company will receive financing.
Step 4: Initiate contact with leasing companies.
The best way to make contact with a leasing company is a referral from a current customer or vendor that has an existing relationship. This is helpful because you can get first hand feedback about what it is like to work with the leasing company. Additionally, leasing companies will feel more comfortable with you and might take extra steps to insure your application is approved if you are connected to one of their existing customers. If you don’t know of any leasing companies, ask one of the vendors you are getting quotes for equipment from if they work with a leasing company. Over 90% of the time equipment vendors will have an excellent relationship with a lender they can leverage.
The last source for equipment leasing companies is the Internet. I would suggest going to organic listings and not pay for click listings. The pay per click listings tend to be small equipment leasing brokers that don’t fund their own transactions. Make sure all the companies you consider are members of UAEL, ELFA, or NAELB. Request literature and information on a few leasing companies and pick three you like but do not apply with any of them yet.
Step 5: Pick one company to apply with
Apply with one leasing company. By now you know what you are buying, your business credit scores, and your personal credit scores. Leasing companies have a tremendous amount of information to provide you with a very accurate quote. Don’t be too concerned about the lowest payment. You should focus on how easy it is to work with the leasing company, late fees in the contract, and how often the leasing company will have to pull your credit. Most lenders do a credit inquiry after 90 days if you are looking to add more equipment. Other lenders pull your credit regardless of when it was last checked. Some leasing companies also only have a 3-day grace period that will almost guarantee a late fee that is typically 10%. If you choose a larger lender you might find you are stuck with offshore customer service and diminished decision making once you are in their system. Ease of use and availability are very important. Most companies should be very close in the terms they offer so try to understand who you like working with and pay attention to how friendly the terms of the contract are.
Step 6: Get approved
Now you are ready to apply for the financing with the lender you have chosen. The approval process can take anywhere from a couple of hours to a few days depending on the amount of your request. Once you have an approval, evaluate all the terms. It is extremely important to match the equipment payment to your cash flow. If you are buying equipment with a long useful life, such as a large commercial printer, it might be the best decision to select a longer term such as 60 months. For equipment with a shorter lifecycle, like computers, 36 month leases are advisable. Most leasing companies also have deferral payments that can offer huge savings on cash flow until you get the equipment running and making your business money. Most companies will offer no payments for 90 days or even 180 days. That extra time that can make a huge difference for smaller companies.
Step 7: Understand the payments and term
Some entrepreneurs get so excited about the new contract they just closed that they jump headfirst into a lease for new equipment. Understand that if business falls through, you must have a contingency plan. There is nothing worse than making a payment for equipment you no longer need and/or cannot afford. Review all the terms on the lease, make sure you know your options and understand the contract. Most companies will allow minor changes to reflect your businesses needs.
Step 8: Have fun
You never thought equipment leasing could be fun did you? Think of it this way, a leasing company can help you maximize cash flow and increase profits. Think of a leasing company as a silent partner who doesn’t tell you how to run your business. Maximize your capital. Enjoy your dreams and your business, but please plan for you, your business, and your lenders. It will play a huge role as you continue to grow.