Equipment Leasing And Financing Products | Recessionary Impacts

How have Equipment Leasing And Financing Sources Been Impacted By The Recession?

As we move towards the end of the year, equipment leasing and financing companies are still dealing with the financial impacts of the current recession.

Like any type of lender, a leasing company requires a source of capital which is made up of a composition of equity that is debt leveraged to the max to achieve the largest potential money supply at the lowest possible cost.

In 2009, the cost of capital for many lease companies went up as many of their related funding sources added greater risk premiums into their cost of borrowing for leasing products.  Add to this the increased number of business failures and resulting lease facility losses from delinquent accounts and the result has been less lease companies with more conservative lending policies and higher rates.

The more conservative lending policies are largely driven by two things.  First, the unpredictable nature of recessionary impacts makes it harder for lenders and financiers to assess the credit worthiness of any particular applicant.  So current approvals are targeted to low to medium debt leveraged companies who have some ability to withstand and manage through any reductions or anomalies in their respective cash flow.

Second, equipment leasing can be largely based on the ability of the lessor to predictably be able to liquidate an asset if necessary in terms of the the time it takes, the costs incurred, and the net proceeds they can expect to receive.  During recessionary periods where business failures occur, the market can see significant increases in supply for used equipment.  This can result in lender or lessor losses as forced liquidation values drop.

While these financing conditions exist for all types of lenders, equipment finance companies as a whole are significantly impacted due to their smaller relative size which does not provide them with a large margin of error.

For the business owners, the noticeable changes when seeking equipment financing are that overall rates for leasing products are higher than they were a year ago.  All things being equal, an approved equipment loan tends to come at a cheaper cost of financing than a comparable equipment lease.  This typically is only relevant for “A” credit deals, as there aren’t many equipment loan products available for lower credit applications.

For lease financing, The “A” credit risk lenders are looking for A+ deals, the B Lenders are looking for A to A- deals, and the C Lenders are looking for B deals.

There is credit to be had, but it can be hard to locate if your application is a mid to higher level risk.  And the rules change constantly as lease companies monitor their portfolios and their liquidation pathways in the market.

While lending policies and rates have loosened up a bit over the last few months, expect equipment leasing options to continue with higher rates and tighter terms for the foreseeable future.

An Often Forgotten Source Of Business Acquisition Financing

Before Seeing Your Banker About Business Acquisition Financing, Perhaps You Should First Talk To the Vendor

More and more business acquisition financing is provided by the actual vendor or seller, not just your banker. And in many cases, bankers will not even entertain providing acquisition financing unless the vendor is contributing some amount of financing as well.

This is especially true with purchasing a small business where a good portion of the sale price is tied up in Goodwill. Most lenders will not finance 100% of the goodwill. Actually, most lenders won’t finance any goodwill without some amount of additional security, guarantee, or surety from the buyer.

The lenders logic is that if the vendor is so certain that the value for goodwill in the purchase price is valid, then they should have no problem providing the financing by basically deferring the portion of the proceeds earmarked to goodwill until an agreed upon time in the future.

There are a couple of other reasons why vendor financing is more common for acquisition financing than you may think.

First, any purchase and sale agreement I’ve ever seen always has some form of recourse present to protect the buyer against mispresentations of the seller and vise versa. By having the vendor provide some amount of financing towards the purchase, there is effectively a recourse fund in place which further protects both the buyer and any potential lender that also gets involved.

Second, by having an active stake in the business being sold in the form of a vendor loan , the vendor is highly motivated to provide a seamless transition to the new buyer as well as ongoing support if required.

Many times, the vendor will take the money and run after the completion of sale and payment of all the proceeds, leaving the buyer to deal with any unknowns or transitional problems that might arise. And depending on whose statistics you subscribe to, one of the top reasons for the failure of acquired businesses is due to poor ownership and management transition.

Vendors tend to not want to provide financing if they don’t have to, which only makes sense. However, failure to be open to vendor financing can also leave businesses unsold for several years as potential buyers are not able to secure enough lender financing without the vendor being involved.

Business Loans And Business Financing… What Lenders Don’t Tell You In Their Advertising

Ever since you were old enough to watch TV, you’ve been exposed to massive branding campaigns by Lenders for personal loans and financing, and business loans and financing.

The primary brainwashing we all receive is that your banker is your friend and that if you need a loan, come in and see him and he’ll help you out.

Right?

Its a fantastic marketing strategy driven by billions of dollars in advertising whereby we all have the major banks in our cities, regions, and countries branded into our brains.

The offshoot is that the major banks draw everyone into their marketing funnel and they keep the ones they want, which for business financing would roughly be 10% or less of those that apply.

Why so low?

Because major banks are low risk lenders that are looking for the low risk customers only.

They just don’t tell us that.

Now there are hundreds of thousands of lenders in the world outside of major banks and they do much the same thing, albeit on a smaller scale.

But the message is pretty much the same … Come and see us and we’ll help you out.  Or, if we see lots of people, we’ll be able to pick out the ones we’re looking for.

Basically, the general population is treated pretty much like cattle when it comes to business or personal financing… we’re driven in one direction and then redirected  in another.

Why?

There are a number of reasons.

First, in general, our society has a very low finance I.Q. due primarily to the fact that there is virtually no basic finance related education, so lenders would rather say they can help everyone than risk sending out a confusing message of what they really want in what I would call meaningful detail.

Second, a lender portfolio can be quite complex to manage and ever changing as the overall market place changes which causes their target to change.  So no lender wants to say this is what they’re looking for today, and then potentially need to change it tomorrow.  Its better to keep things vague.  So instead, they just keep rolling out the same “come on in, we can help anyone” message.

Third, Lenders are opportunists just like the rest of the world.  During the latest sub prime market fiasco, Major Banks cut back and in many cases stopped lending money, crippling the money supply.  They used the crisis to put pressure on the government to give them payouts and concessions to strengthen their balance sheets, otherwise the lack of available capital would further worsen the recession.

Asset based lenders did the same thing.  Because “A” Banks or Big Bank were pulling out of the market, more expensive asset based lenders were getting better qualify deals.  The smart ones were making a fortune taking on lower risk deals without lowering their fees.  But this also left a funding gap in the “B” and “C” Markets as its becomes a domino effect from the top down.

So keeping it vague, has always been the way to go.  And as a result, it can drive you around the bend trying to figure out exactly who can help you at any given point in time… who is currently relevant to your specific financing requirements.

So, what can you do to find the right source at the right time?

1.   Be realistic in the sense that no matter how much a lender may flip flop on their client selection, major banks, for example, are always going to be low risk lenders that are more focused on balance sheets will low leverage than anything else.  If you don’t fit that basic description, don’t apply.  Each category of lender has a basic profile that they won’t stray too far from, no matter what they tell you.

2.  Consider utilizing the services of a financing consultant/specialist (not just a broker … big difference).  This is someone who has their ear to the ground and is staying on top of the twists and turns in the market.

3.  Instead of blindly applying to lenders according to the way we’ve been brainwashed,  start qualifying them yourself.   Remember that you’re the customer and you’re time is worth something too.  So instead of patiently going along with some of their long and drawn out application and interview processes, start by asking them questions related to what you’re trying to do and focus your time one the ones that give you the straightest, most direct, and most committed answers.

Its still going to be a bit of a crap shoot, but still better than just showing up and expecting anyone to be able to help you, despite what they tell you in their latest commercial.

Click Here To Speak Directly To Business Finance Specialist Brent Finlay

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In Business Financing, There Are Exactly 4 Uses of Debt And Equity Capital

When seeking any type of business financing for any sized business, small or large, there are four and only four uses or applications of capital.  I’m going to go over each of them and why this is important to know and understand.

First of all, why is this at all important?  Identifying the exact use of capital creates greater relevance in the capital procurement process.

OK, I’ll speak English.  Locating suitable capital funds, either debt financing (business loans), equity financing(investor capital), or a combination of the two, will depend to some degree on how the funds will be applied in your business.

Lenders and investors can be very specific in deals they will seriously consider funding and one of their key criteria will be how the funds will be applied.

Certain applications of funds will completely remove certain lenders and investors from the mix.  By understanding this at the outset, you can create greater relevance in your search to secure capital by screening out the sources of money that will automatically not be interested in your deal.

This doesn’t mean the deal is good or bad, its just not going to be relevant to certain sources of business financing.  So you can save yourself a lot of time and aggravation focusing on relevant sources.  There are of course other criteria that helps determine relevance, but for today let’s stick with use of funds.

So what are the 4 uses of debt financing and/or equity financing?

– Start Up.  The start up of a new business venture.

– Acquisition.  The acquisition of an existing going concern business.

– Expansion.  The Expansion of the assets of an existing business for the purposes of growth.

– Debt Consolidation/Reorganization. The repackaging of existing and potentially new debt into a modified or new debt instrument or instruments.  This predominately relates to businesses in some distress or downturn that need to either inject more capital into the business to cover losses or move short term debt to a longer term debt instrument to improve the balance sheet and security position of lenders.

Within each of these uses, there are even more specific sub uses such as:

– working capital to finance day to day operations
– short term capital to purchase and add value to inventory
– short term capital to finance accounts receivable
– longer term capital to acquire other tangible assets like equipment, buildings, and land.
– capital to acquire  intangible assets

If you are seeking business financing for a start up venture, there are many sources of capital that don’t fund start ups.  Identify them, and don’t waste your time asking them for money.

If you’re looking to acquire an existing business, don’t seek funds from someone providing trade credit related to working capital type assets only.

As I alluded to earlier, there are other twists to this as well as certain lenders and/ or investors will consider expansion funding, but have other criteria to determine if the deal is relevant to them (amount of funding, industry, debt to equity ratio of the balance sheet, debt service coverage, assets to be acquired, security ratio, etc.)

Each lender will have their own criteria set for each application of funds they will seriously consider.  I say seriously consider because most lenders state at the outset they will look at virtually any deal to maximize their marketing efforts, but in reality, they all have a pretty narrow focus.

That’s why its important to understand how to accurately describe the business financing you seek and then qualify the universe of funding sources so that you’re only spending time with a relevant list.

But more in depth lender qualifying is a topic for another day.  Stay tuned.

Click Here To Speak Directly To Business Finance Specialist Brent Finlay

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Small Business Financing Possibility Versus Probability

Several times each week, I talk to small business owners who are seeking capital for their new or existing business and several times I have a very similar conversation with each of them that I thought I’d share today.

At the beginning of the conversation, I always ask the same two questions:  How much money are you looking for? what’s the purpose of the funds?

I would say that at least 75% of the time, I have to re-ask these two questions two or three times before they’re answered.  Most people think that telling me a long drawn out story of what they want to do and how they came to do it will be more important than answering these two questions.

What tends to come out after a few minutes is that the individual is hunting for what I call stupid money.  You know, the kind that is prepared to write you a check on a very thin and likely non existent business plan where the lender is taking all or close to all of the financial risk.

Example.  Someone has a great idea for a tennis equipment store.  They have picked out a location and now need $300,000 for start up costs, working capital, and inventory.  They have poor credit, personal debt, zero net worth, and no capital to contribute to the venture.

Is it possible that this individual could secure small business financing of some sort? Yes.

Is it probable? No.

That’s the great thing about the money business, virtually anything is possible, and I’ve seen enough to know first hand.  After getting off the phone with me, this would be entrepreneur could go to the coffee shop, strike up a conversation with someone about his or her golf shop idea, and leave with a check in hand for the capital sought.  Is is possible?  Absolutely.  Is it likely to occur?  The odds would likely be lower than playing the lotto.

That’s why I’m always careful to not generalize about small business financing, as there is an infinite sea of money out there and strange things happen all the time.

But lets also get real.  Just because its possible, doesn’t mean your new business financing strategy is to start going to coffee shops.

For the most part (can never generalize), money has a basic intelligence.  If intelligence is not applied, the source of money will disappear very quickly based on making bad decisions.

People supply money to business ventures for a return.  If you can show them a path to the return they seek within the level of risk they’re prepared to take, then eventually, you will find a source of capital for your small business financing requirements.

And here’s my tip of the day on this subject:  You must have something to leverage and something to lose in order to have a realistic probability of getting business financing, whether it be for a new venture or existing business.

Something to leverage for low risk credit is your credit score, personal net worth, external cash flow, third party guarantee.  Something to leverage for higher levels of credit risk would also include things like asset security, established cash flow, signed purchase orders from reputable companies, patents, intellectual property, contracts, etc.  Remember also that something to leverage has to have a value to the source of money or there is no leverage.

Something to lose is at the very least the capital that you directly invest into the venture.  100% financing of anything is quite rare unless you’re taking about residential real estate and look what problems that has caused in the markets over time.  Personal guarantees and corporate guarantees would also fall in this category if there was enough net worth to make them meaningful.

As the amount of leverage and borrower risk increases, so does the probability of securing capital.

Click Here To Speak Directly To Business Finance Specialist Brent Finlay

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