The financial markets and financing in general has changed because of the recession. Doing ‘business as usual’ has tightened up quite a bit and understanding the playing field will help get your financing requests completed more quickly and dampen some of the frustrations which can occur during the process. There are myths and misconceptions regarding the approval process and new ones which have popped up with the changed landscape which require some clarification. Let’s take a look.
Myth 1: Lenders are not lending anymore, only perfect credit gets 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 of the ones 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 make sure that 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 going better, they got fast approvals with good rates but with declining financials, they either get 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 equals risk.
Myth 2: If my bank rejects me then so will everyone else.
Not true; banks have specific guidelines they operate under. The U.S. banking system is the most regulated in the entire world and subsequently, flexibility with an individual client or business just 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 and if your credit is not perfect, you can still get approved. Moderate credit will require you pay more interest but at least you have an avenue to 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 have the task of 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 exactly what they focus on. If you are concerned and have not reviewed your credit report in the past 3 months then you should request a copy before you submit your application. You can get 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 own credit and Dunn and Bradstreet report and make sure it is accurate and that mistakes are corrected immediately. This allows you to clear up issues prior to anyone reviewing your past history. Dealing with issues after the underwriter has begun their process is not as effective since your file will now be “pending” and does not receive the same priority. Underwriting wants to approve your request but the current snapshot of your business and history all have to make sense and the risk 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 are not the same. Different states have different guidelines but in general terms, only operating or fair market value leases are tax-deductible. These leases are structured so that at the end of the term, if the lessee wants to keep the equipment they have to pay a current market value of that asset as determined by the lender. If the market value is preset by the lender at the start of the lease then it really 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 a main buying point for you then 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.
Not always the case. Business owners should consider captive finance companies (offered by equipment vendors) instead of their local commercial bank. 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 as to the best type of finance structure for your business and 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, there are often better results.
The finance markets have changed due the recent recession but many of the same basic lending principles still apply. Understand the players and be thorough in preparing your financial documents so that you are likely to get a fast approval at the best rates. If your business has had a down swing, evaluate whether it is worth getting a higher rate lease or loan or simply waiting until your business stabilizes again before adding more debt.