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Equipment Financing and the Five C’s of Credit Evaluation

Equipment financing lenders, as well as banks, use the Five Cs to evaluate loan applications: Character, Credit, Cash Flow, Capacity and Collateral. However, while banks look at small-to-medium size companies from a Fortune 500 perspective, equipment financing companies see applicants from a small business perspective, which highlights a sixth C: Common Sense.

Here is what a lending institution means when referring to the Five Cs:

CHARACTER -

Every lender wants to understand what type of borrower an applicant will be in order to make smart, safe credit-granting decisions. The longer a company has been in operation, the more its payment history and outstanding credit reveal management’s attitude toward debt and making timely payments. Public records and references can come into play; still, the most reliable yardstick is the character of a smaller company’s owners. How they manage their personal financial obligations is usually a reliable indicator of the likelihood of their making timely payments. The more closely held a company, the more attention given the personal credit history of those in charge and their prior business history. No matter how solid a business plan appears and how reliable a company’s owners have been in the past, the realistic lender also wants the assurance of personal guarantees from the company’s owners. This may take the form of a signature or a pledge of cash or other collateral.

CREDIT -

Business credit reports offer a quick glance at a company’s willingness to pay trade accounts on time, as well as any derogatory public records, such as suits, liens, or judgments that negatively affect a company’s credit rating. Such reports also show any UCC filings. Potential equipment lenders are interested in the depth of a business’s borrowing history. The longer a company has been in business, the easier it is for a lender to determine credit stature; a good ten- or twenty-year credit history obviously carries enormous weight. This places a startup company less than two years old at a disadvantage. So, when traditional data sources, such as Dun & Bradstreet and Paynet cannot supply adequate information, the personal credit histories of a company’s owners become highly important.

CASH FLOW -

Lenders want to see that any company applying for a loan earns enough money to meet payroll, cover fixed operating expenses, and comfortably make timely payments on a new equipment loan or lease. While there are a number of ways to define cash flow, lenders most often calculate the cash flow available to repay new debt as net profit plus such non-cash expenses as amortization and depreciation.

CAPACITY -

Capacity is similar to a football team’s depth chart. The capacity to weather bad times is equally important to a company seeking funds. Capacity acknowledges that sometimes unforeseen things happen: a key employee becomes unable to work; a major customer is lost; an economic turn-down drastically reduces demand for product or services. Any number of other unlikely – yet possible – disruptions can negatively affect a company’s cash flow. And these disruptions can be temporary or permanent. So, capacity measures a company’s ability to pay off an equipment loan or lease with cash reserves or its ability to quickly convert real estate, stock, or other assets into enough funds to cover debt.

COLLATERAL -

How much collateral, above and beyond the equipment being financed, a company needs to secure a loan or lease depends largely on the nature of the lender and status of the business. A traditional bank often requires a blanket lien on all assets of the business while an equipment finance company normally uses only the equipment for collateral. A few lenders also offer sale-leasebacks and refinancing of existing equipment debt. This allows a company to free up cash flow or lower their monthly payment through equipment loans or leases.

COMMON SENSE -

Every decision to purchase and every decision to grant financing must be based on common sense. A lender needs to understand how additional equipment will increase the company’s stability and growth. Notwithstanding the risk every lender takes and the gamble every company makes when purchasing new equipment, for both lender and borrower, the foundation of a decision to finance equipment begins and ends with common sense.

Small Business – Looking For Business Financing and Business Funding

Looking for business financing generally refers to entrepreneurs searching for funding resources for a business. Businesses need capital for start-up and operating expenses, and many financial institutions provide loan programs to fulfill that need.

When looking for business financing, most entrepreneurs go to the Small Business Administration (SBA) first. This government agency supplies funding to business that employ fewer than one hundred workers and that have been denied by traditional lenders, such as banks. Their most common loan program is the 7(a) loan, which guarantees a certain percentage of a loan provided by a traditional lender. The loan requirements for start-up and existing businesses differ somewhat, but both require applicants to supply personal and business financial documents along with a written business plan. If a business meets the criteria for a 7(a) loan, it can download and print the application available on the SBA’s website to give to a lender who participates in the SBA’s guaranty program.

Existing businesses looking for immediate business financing usually turn to factoring. With factoring, a business sells its accounts receivables to another company, known as a factor. Most factors require businesses to process credit cards and to have been doing so for a certain length of time, usually three to twelve months. Once approved, the factor collects the payments on the accounts from the business’s clients until the funds are repaid. Factoring is not considered a loan; therefore, no debt is incurred on the balance sheet.

Looking for business funding refers to entrepreneurs who are searching for ways to fund a small business. Funding is needed for start-up and operating expenses. Many lenders provide specialized loan programs to assist small business owners in starting and maintaining their business.

A majority of entrepreneurs go to the Small Business Administration (SBA) when looking for business funding. This government agency provides loans to small businesses that employ fewer than one hundred workers and that have been denied by traditional lenders, such as commercial banks. Their most common loan is the 7(a) loan. The application requirements for start-up and existing business differ, but both require certain financial documents and a business plan. Certain variations of this loan may require additional documentation. To apply for the 7(a) loan, applicants should collect all needed documents and take them to a lender who participates in the SBA guaranty program. With this program, the SBA will guaranty a certain percentage of a small business loan in order to alleviate the lender from unnecessary risk.

Another source to consider when looking for business funding is a private investor. A private investor will contribute large sums of capital to a business in exchange for a portion of the profits. The best way to attract potential investors is to have a well-written, feasible business plan. Before an investor contributes any capital, it’s best to make sure that he or she is providing equity, not debt. Debt means the investor expects the business to repay all or part of the given capital.

Personal Finances and How to Manage Them

They say money can’t buy you happiness, but it provides you comfort in life. Worries over financial matters in the family can increase tension. Managing your personal finances can save you and your family from a lot of trouble. Here are areas you have to bear in mind and why you should manage your personal finances:

  • Necessities of the family. You have to save money so that you can buy groceries and other personal necessities of yours and your family, and to be able to tend to other things such as water and electricity bills, maybe school tuition of your kid, school supplies, fixtures, fixture repairs and the like.
  • Unforeseen Casualties. One should be prepared when it comes to floods, accidents, death, failing health and the like. Acquire insurance for these. There are some cases in which these casualties are self-insurable; however most require that you sign an insurance contract.
  • Tax. Taxes are one of the expensive expenditures that occur in the household. When your income rises, you will have a much higher tax payment. The government may give incentives, like tax deduction, that may lessen tax burden.
  • Retirement Planning. How much expenditures would occur when one lives after retirement? Can the household income support it?

With these in mind, you cannot sleep peacefully or think clearly, can you? Here are ways on how to manage your finances:

  • Save. Allot a portion to your income as your savings. A large amount of savings will make you be prepared for any unforeseen events and casualties. Ten dollars a week seems a good start. If you can go any higher than that then it’s good. But don’t deprive yourself and your family of necessities.
  • Budget. Create a simple guide or a list as to what will you be spending and how much money you can afford to spend. Stick to it. Sticking to your budget will lessen your burden from other personal finances you may deal with later. When shopping or simply going to the grocery store, why not write a list or simply remind yourself that you should only max your expenses on a certain amount?
  • Set priorities. Carefully plan your finances. Prioritize what should be needed at first than settling on what you want. Choose: A new bag or paying the electricity bills? Setting priorities first can eliminate consequences that will tear your family apart. Overcome your splurging habit – this will make it easier for you and your family.
  • Don’t “play” with your credit card. Exceeding your card limit and paying it late will cost you an enormous sum. Credit Cards have limits. Control yourself and don’t be impulsive when it comes to buying.
  • Make yourself aware of the present interest rates. When borrowing money from financial institutions or having your jewelry pawned, pay attention to the payment terms and conditions. Pay before or within the deadline date and you will save yourself from any problems that will happen.
  • Deposit your money in the bank. Know your bank – whether they’re trustworthy or the bank is not that reliable. You can choose from a variety of accounts available – savings account, time deposits, etc. Savings accounts have rates that can raise your deposits a little higher.