3 Key Factors to Equipment Finance Approvals

CASH, CREDIT & COLLATERAL

A variety of factors are considered when a company’s credit is being reviewed for potential finance approval but 3 main areas consistently pop up as the most important.

Cash Flow – The first key to receiving a lease or finance approval is positive cash flow. Most underwriters’ 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 finance payments. Depending on the type of project or equipment financed, the cash flow may have to be 2 or 3 times the amount of the finance payment. Typically, the documents needed to verify cash flow are tax returns, financial statements and business bank statements.

Credit – Business credit scores are recorded by companies like Dunn & Bradstreet and Paynet. Depending on the size of the business, personal credit scores can play a large role in finance approvals. A 700-plus credit score is required from “A” lenders, and 650-plus are required by “B” lenders. In general, the main difference between the lenders is an “A” lender will finance a higher dollar amount at a lower interest rate. Be aware when forming a partnership that the lowest FICO score in the group will drag the partnership down when considering financing in the future.

Collateral – Not every company has a low-risk, super clean D&B rating nor does every business owner have a 700-plus FICO score so this is when the type and value of additional collateral comes into play. Some lenders approve financing to applicants who offer collateral in addition to the equipment being purchased. Collateral can be in the form of standard equipment, heavy machinery, trucks, patents, stocks, CDs or real estate. Equipment is assigned a value of what its auction liquidation value would be.

Lenders look for a balance of these key components but if one factor is outstanding, it can make up for weaknesses in other areas. We like to have various lenders review applications which have different challenges because lenders vary the criteria they base their approvals on.