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