There are 3 areas to be aware of which directly affect the outcome of your finance request. To get approved, you have to be strong in at least one of these areas otherwise, wait until your situation improves or bring on a strong credit partner.
1) Cash Flow: The key to receiving a lease approval is positive cash flow. Most underwriting formulas add net income to a portion of depreciation (since depreciation is a noncash expense) and the resulting free cash flow must exceed the annual finance payments. For example, if the company has a $75,000 net income with $50,000 in depreciation, an underwriter may consider that at least $100,000 is available to repay a new equipment lease. If the lease requires annual payments of $50,000, the lease will be approved and if it requires $120,000, the request will be denied because the cash flow is too low based upon history. Typically, the documents needed to verify cash flow are tax returns, financial statements and business bank statements.
2) Credit: Business credit scores are recorded by Dun & Bradstreet and Paynet. Defaults, late pays and liens are all captured by this report with an overall rating of how healthy a business is operating. Many smaller businesses require a personal guarantee. Consequently, personal credit plays a large role in finance approvals. A 700-plus credit score is required from “A” lenders, and 650-plus are required by “B” lenders. The main difference is an “A” lender will finance a higher dollar amount at a lower interest rate than a “B” lender. Understanding this concept is important in determining the effect of individual partners in a business; the “weak link” partner will always drag the group down and may cause rejections.
3) Collateral: Not everyone has a 650-plus credit score, and not everyone owns a company that reports a positive net income. Some lenders will finance applicants who offer collateral in addition to the equipment being purchased. Collateral typically is in the form of stock, CDs, real estate (personal property) and equipment. A business with heavy equipment like CNCs, forklifts, Yellow Iron and work vehicles can use it as collateral to secure a new equipment finance.
Strength in one of these key areas will help get your finance request approved. The best approvals will come when you are strong in all of them but at least one of them will help get you across the finish line to help realize your business goals.