Three Keys to Equipment Lease Approvals
There are three key components to getting your funding application approved; cash, credit and guarantees. This is true whether it is to obtain an equipment loan or lease, rent a car, or finance a new home. All three components play an important role and understanding them will help clarify the financial process.
Cash Flow – The first key to receiving a lease or financial approval is having a positive cash flow. An insurer will add net income to a portion of depreciation (and any other non-cash expenses) and the resulting free cash flow must exceed the amount of the annual lease payments. For example, if the business has a net income of $ 75,000 with $ 50,000 in depreciation, an insurer may consider that at least $ 100,000 is available to pay for a new lease. If the lease requires annual payments of $ 50,000, the lease will likely be approved, and if it requires $ 120,000, the application will be pending because the cash flow is too low based on history. Typically, the documents needed to verify cash flow are tax returns, financial statements, and bank statements.
Credit: Dunn & Bradstreet primarily records companies’ business credit ratings. For small businesses, the financial transaction is sometimes guaranteed by all the owners with more than 10% participation in the capital stock of the company. Consequently, personal credit (FICO score) plays an important role in lease approvals. A credit rating of more than 700 is required from “A” lenders, and “B” lenders require more than 650. The main difference is that an “A” lender will finance a larger dollar amount at a lower interest rate. and will offer more options. Understanding how this works is important in determining the effect of partnerships on a business. The “weak link” will drag the group down to your credit rating, so choose your partners wisely.
Guarantee: Not everyone has a credit score of more than 650 or owns a business that reports a large net income. Some lenders grant applicants leases that offer collateral in addition to the equipment being purchased. A good collateral is typically heavy machinery, construction equipment, stock certificates, certificates of deposit, or commercial and personal real estate. Even a retirement account can be used as collateral. Small items under $ 10,000 and electronic equipment are not currently considered an acceptable warranty. Currently the strongest warranty is commercial property and often a requirement for any solar or LED upgrade.
The most desired financial approvals are based on a minimum level in each of these key areas. If a company lacks one or more of these criteria, it can still gain approval if it is superior in strength to a single key component. A lack in all three areas means trouble getting approval and the best business strategy would be to increase sales and grow the business even more before considering adding additional debt.