Equipment Leasing: The Big Three

Sports teams have the Big Three many times when they win a championship, and your business will need them too. The three big C’s in business financing are: cash flow, credit, and collateral. To stand a chance of getting money from a lender, you must have at least one of these positively thoughtful attributes, and if you have two or all three, then your options open up dramatically.

The traditional eight “C’s” in banking are: credit, character, cash flow, capital, capacity, collateral, terms and commitment. For bank approvals, you often have to get all of this online, which can be quite daunting for many businesses, but with third party or alternative financing, you really only need to consider the “Big Three” and sometimes you only need one of they.

Cash Flow – The key to receiving a lease or financing approval is positive cash flow. Most insurer formulas add net income to a portion of depreciation (since depreciation is a non-cash expense) and the resulting free cash flow must exceed the amount of the annual lease payments. Many lenders require cash flow to exceed lease payments by a multiple of 2-5 times, depending on the dollar amount requested. Typically, the documents needed to verify cash flow are tax returns, financial statements, and business bank statements. When cash comes in, even if other areas are poorly managed, it shows that the company is selling and moving a product or service, which is always a healthy sign.

Credit: Dunn & Bradstreet and Paynet track business credit scores. Indicates the risk category that a business operates; Linkages and defaults on other loans are also recorded. A company should pay special attention to what is on its report, as creditors place a high value on the information it contains. More and more lenders are using the D&B report as their initial review of a business.

Since for small businesses, the owner can guarantee a lease transaction; personal credit plays a large role in lease approvals. FICO is the system that tracks personal credit; A credit score of 700+ is required for “A” lenders and 650+ for “B” lenders. The main difference is that an “A” lender will finance a higher dollar amount at a lower interest rate. Lenders feel that if an owner manages his personal affairs correctly, then he is more likely to manage his business in the same way. Both business and personal credit play an important role in qualifying for outside financing. Don’t ignore it, even your company is making a lot of money but you make the mistake of not paying your suppliers.

Collateral: Not all businesses have a great D&B rating or all have a 650+ credit score and many haven’t reported positive cash flow in quite some time either. However, there is still hope if you have good collateral assets. Some lenders offer leases to applicants that pledge collateral in addition to the equipment being purchased. A good collateral might be stocks, CDs, heavy equipment, trucks, yellow iron, or real estate. There are certain specialized lenders for each type of collateral who know the specific market very well.

Having at least one of the Cs (cash flow, credit, and collateral) will help you get approved for outside financing, and if you’re positive on all three, you’ll have a variety of options depending on your business goals. Whether it’s for working capital, a location expansion, or the purchase of new equipment, you’ll find that alternative financing will be much more flexible in terms of your qualifying requirements compared to traditional loans.