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Equipment Financing And The Five Cs Of Credit Evaluation

Equipment financing lenders, as well as want to see that any company applying for
banks, use the Five Cs to evaluate loan a loan earns enough money to meet
applications: Character, Credit, Cash payroll, cover fixed operating expenses,
Flow, Capacity and Collateral. However, and comfortably make timely payments on a
while banks look at small-to-medium size new equipment loan or lease. While there
companies from a Fortune 500 perspective, are a number of ways to define cash flow,
equipment financing companies see lenders most often calculate the cash
applicants from a small business flow available to repay new debt as net
perspective, which highlights a sixth C: profit plus such non-cash expenses as
Common Sense. Here is what a lending amortization and depreciation. Capacity -
institution means when referring to the Capacity is similar to a football team's
Five Cs: Character - Every lender wants depth chart. The capacity to weather bad
to understand what type of borrower an times is equally important to a company
applicant will be in order to make smart, seeking funds. Capacity acknowledges that
safe credit-granting decisions. The sometimes unforeseen things happen: a key
longer a company has been in operation, employee becomes unable to work; a major
the more its payment history and customer is lost; an economic turn-down
outstanding credit reveal management's drastically reduces demand for product or
attitude toward debt and making timely services. Any number of other unlikely -
payments. Public records and references yet possible - disruptions can negatively
can come into play; still, the most affect a company's cash flow. And these
reliable yardstick is the character of a disruptions can be temporary or
smaller company's owners. How they manage permanent. So, capacity measures a
their personal financial obligations is company's ability to pay off an equipment
usually a reliable indicator of the loan or lease with cash reserves or its
likelihood of their making timely ability to quickly convert real estate,
payments. The more closely held a stock, or other assets into enough funds
company, the more attention given the to cover debt. Collateral - How much
personal credit history of those in collateral, above and beyond the
charge and their prior business history. equipment being financed, a company needs
No matter how solid a business plan to secure a loan or lease depends largely
appears and how reliable a company's on the nature of the lender and status of
owners have been in the past, the the business. A traditional bank often
realistic lender also wants the assurance requires a blanket lien on all assets of
of personal guarantees from the company's the business while an equipment finance
owners. This may take the form of a company normally uses only the equipment
signature or a pledge of cash or other for collateral. A few lenders also offer
collateral. Credit - Business credit sale-leasebacks and refinancing of
reports offer a quick glance at a existing equipment debt. This allows a
company's willingness to pay trade company to free up cash flow or lower
accounts on time, as well as any their monthly payment through equipment
derogatory public records, such as suits, loans or leases. Common Sense - Every
liens, or judgments that negatively decision to purchase and every decision
affect a company's credit rating. Such to grant financing must be based on
reports also show any UCC filings. common sense. A lender needs to
Potential equipment lenders are understand how additional equipment will
interested in the depth of a business's increase the company's stability and
borrowing history. The longer a company growth. Notwithstanding the risk every
has been in business, the easier it is lender takes and the gamble every company
for a lender to determine credit stature; makes when purchasing new equipment, for
a good ten- or twenty-year credit history both lender and borrower, the foundation
obviously carries enormous weight. This of a decision to finance equipment begins
places a startup company less than two and ends with common sense.
years old at a disadvantage. So, when This article was written courtesy of
traditional data sources, such as Dun & Crest Capital, a a commercial equipment
Bradstreet and Paynet cannot supply financing, business equipment leasing and
adequate information, the personal credit software financing company servicing all
histories of a company's owners become 50 states.
highly important. Cash Flow - Lenders




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