The financial markets and financing in general have changed because of the recession. Doing ‘business as usual’ has tightened up quite a bit. Understanding the playing field will help complete your financing requests more quickly and dampen some of the frustrations during the process. There are myths and misconceptions regarding the approval process and new ones that have popped up with the changing landscape require some clarification. Let’s take a look.
Myth 1: Lenders are not lending anymore; only perfect credit gets the money.
This is not true; though the lender market, which is the total number of institutions making loans, has shrunk in the U.S., many still operating have not drastically altered their lending criteria. The same underwriting guidelines are still in place; it’s just that now, underwriters are being more thorough in their background audits and reviews. Time in business, bank accounts, income, and trade sources are all verified carefully to ensure everything is true and accurate.
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The real issue is that since so many companies have had substantial operating losses with diminished sales, they are not getting approved due to poor performance. When things were improving, they got fast approvals with good rates, but with declining financials, they either got rejected or a conditional approval with higher rates due to the increased risk. This scenario falls back on the nature of lending: rate and approval equal risk.
Myth 2: If my bank rejects me, so will everyone else.
That is not true; banks have specific guidelines they operate under. The U.S. banking system is the most regulated in the world; subsequently, flexibility with an individual client or business isn’t there. If your bank rejects you, then you can apply directly with a finance company or with the captive finance the vendor offers. Finance companies and captive lenders are motivated to get the equipment into your hands and approve your request because they don’t get paid unless you get approved, so the motivation is there. They also operate under less stringent guidelines; if your credit is imperfect, you can still get approved. Moderate credit will require paying more interest, but at least you can proceed with your business plan. It’s up to you to determine if the additional interest expense is offset by the additional revenues your equipment will generate.
Myth 3: Underwriters are just looking for problems with my credit to reject me.
Underwriters are tasked with accessing risk and, if they approve the finance, ensuring that it will be paid back in full. Determining risk is their job, and finding impeding issues is what they focus on. If you are concerned and have not reviewed your credit report in the past three months, you should request a copy before submitting your application. You can get a free copy of your credit report from the three main credit bureaus (Experian, Equifax, and TransUnion) once every 12 months.
Review your credit and Dunn and Bradstreet report, ensure accuracy, and correct mistakes immediately. This allows you to clear up issues before anyone reviews your history. Dealing with matters after the underwriter has begun their process is not as effective since your file is now “pending” and does not receive the same priority. Underwriting wants to approve your request, but your business and history’s current snapshot must make sense, and the risk is acceptable for that particular lender’s guidelines.
Myth 4: All leases are 100% tax-deductible.
Wrong! Finance companies promote this in their rhetoric and marketing, but all leases differ. Different states have other guidelines, but in general terms, only operating or fair market value leases are tax-deductible. These leases are structured so that if the lessee wants to keep the equipment at the end of the term, they have to pay a current market value of that asset as determined by the lender. If the lender presents the lease’s market value start, then it isn’t a fair market value lease. This area can be complex in accounting terms, but be aware that not all leases are tax-deductible. If this is the main buying point for you, check with your accountant before signing your contract because the IRS has defined standards on what constitutes a ‘true’ lease.
Myth 5: It’s better to use my bank than the vendor’s financing.
That is not always the case. Business owners should consider captive finance companies (offered by equipment vendors) instead of their local commercial banks. The primary advantage of working with a captive finance company is industry knowledge; the staff understands the industry and the equipment being financed. They can advise you about the best type of finance structure for your business based on the equipment. The purpose of captive financing is to boost sales volume for the affiliated equipment company while making careful underwriting decisions. The captive finance company has more incentive to make the deal happen than your local bank, and where there is motivation.
The financial markets have changed due to the recent recession, but many basic lending principles still apply. Understand the players and thoroughly prepare your financial documents so that you are likely to get fast approval at the best rates. If your business has had a downswing, evaluate whether it is worth getting a higher-rate lease or loan or wait until your business stabilizes again before adding more debt.
