Managing The Cash Flow Gap | Working Capital Bridge Financing
Cash Flow Gap Management Can Be The Key To Growth And Stability
For this discussion, I define cash flow gap as the difference between the timing of cash inflows and outflows. For instance, if your supplier terms are 30 days and your customer terms are 60 days, you will have a cash flow gap to fill with some form of working capital financing.
Even if the terms are equal, there could still be gaps or delays between the time an expense incurred needs to be paid and when the revenues related to the incurred expense get collected.
Some operations are fortunate in that they don’t have a cash flow gap at all. However, in most business cases, there is a need to finance gaps between inflows and outflows on a regular or semi regular basis.
The working capital financing can come in the form of cash from the business itself, an operating loan that is connected to the business bank account and goes up and down as required, shareholder loans, term loans, factoring of accounts receivable, inventory financing, and so on.
For profitable operations, the financing of a cash flow gap is temporary in nature and is effectively bridge financing where the beginning and the end of a cash flow gap is clearly defined.
For operations that are currently unprofitable, the cash flow gap actually creates a longer term liability as the loss position must be covered off from financing for as long as its required for the business to get back into a profitable position and repay the debt.
The keys to managing the cash flow gap are as follows:
- Work to match up the days outstanding for trade payables with the days outstanding for accounts receivable. Gaining a few days through closer management will reduce the cash flow gap.
- If you work on projects, try to match the project costs with the related expenses when negotiating terms and making payments. If a supplier is aware of the project they are supplying for, make sure they understand that they will get paid when you get paid. Suppliers are more likely to work with you on payment delays if they know you are matching the revenues you receive to the project. In order to make this an effective strategy, make sure you are only working with credit worthy customers that the supplier will be comfortable with.
- Assess the benefit of payment discounts versus available working capital. Taking advantage of an early payment discount from a supplier will actually increase your cash flow gap, but this may be worth doing if you have the working capital available and the cost of the working capital is less than the discount you will receive for paying early.
- Forecast out your cash flow for at least 6 months. If you’re in a growth mode or in a seasonal business where sales spike, make sure you understand when cash flow gaps will occur, how much capital they will require, and how long they will last. If you’re going to require more capital than you now have available, you’re going to need some time to secure capital prior to the period of need.
- Focus on higher margin products and services to offer. If the cash flow gap is increasing, it may be negatively being impacted by growth in lower margin products and services, or a change in your mix that has lowered your overall margins. Again, good forecasting and periodic sales review should help identify the size, timing, and duration of cash flow gaps as well as their causes allowing you to take proactive measures to avoid the business being negatively impacted.
Cash Flow Choices To Carefully Consider
When Managing Cash Flow Shortfalls And Gaps, Consider These Watch Outs
When a small business cash flow gets tight, there are going to be tough choices to make regarding who gets paid and who’s payments are going to get delayed.
If you have employees, then its going to be important to allocate available funds to payroll to keep them coming to work. If you require services and materials from suppliers, then timely payments are likely required to keep the lights on and production running.
So where do you cut back on outflows? Who do you decide not to pay? One of the most common choices made for delaying payments is government remittances.
Payroll deductions, income taxes, sales taxes, etc.
For many small business managers and owners, this seems like a logical choice…i.e. the government has lots of money, no one is in your face right away for payment, the money due is not critical to your ability to operate, and so on.
And in many cases, arrears with government related accounts can build for months before you start getting more serious sounding requests for payment.
While the government may be somewhat slow in reacting to your missed payments, their ability and powers to collect what you owe (depends on country and jurisdiction) can be far reaching.
How far reaching?
They can freeze the business bank account.
They can seize the cash in your account.
They can contact customers that owe you money and direct them to make payment to them.
And, if you owe funds for payroll source deductions, they can come after you personally regardless if the company in incorporated if you are a director of the company. Director liability can include payroll related expenses.
To be clear, I’m not a lawyer and all of the above may or many not apply to the jurisdiction that your business falls under.
But, regardless of where you reside, government collection activities can be scary. An once they have a bead on you, your cash flow planning will need to take on new priorities.
If you are in this situation, or close to it, you may be able to negotiate repayment terms for the arrears over a period of future months provided that you can clearly display a workable plan.
The overall point here is to be careful with delays in paying government remittances of any type, but especially payroll deductions. If you get to the point where you’re bank account gets frozen, it could be difficult to impossible to resolve the government back taxes and still continue to operate
Selling A Business | Selecting Your Advisers
Here’s Some Suggestions On Selling A Business You May Want To Consider
Regardless of the size of a business for sale, there are similar elements that need to be covered off. As the size and related complexity of the business grows, there will be more service providers interested in providing you with services to aid the process.
Lets face it, when business sales get into the millions of dollars, there will be cash available to pay for fees, so more service providers throw their hats into the ring to potentially become one of your advisers.
There are the obvious advisers such as your accountant and lawyer, but there are also business valuation experts to help establish the sales price, business optimization experts to help increase the value of the business prior to sale, taxation specialist that can help with more complex tax savings strategies that may be beyond the expertise of your own accountant, business brokers who put your business up for sale and market your business to buyers, financing specialists that advise you how to make the business more finance-able for the buyer, investment consultants that want to help you optimize the future value of the proceeds you get out of the business, and so on and so on.
These various services can each be provided by a specialist or sometimes one individual can fulfill multiple roles. There are also merger and acquisition firms that bring all the pieces together so its more of a one stop shop to consider.
If you spend any amount of time talking to all these experts, you’re head will start spinning from the multitude of issues they raise leaving you wondering how anyone successfully sells their business without losing their mind in the process.
Here are some survival tips to consider when selling a business.
First, its always good to start at the beginning. Evaluate your existing advisers to see how they stack up to the challenge ahead. Just because you’ve had the same lawyer or accountant for 20 years doesn’t mean they can provide the level of service you require for this very specialized and sometimes complex transaction.
Lawyers and accountants all specialize in different areas. If your lawyer and accountant do not specialize or at least have significant experience helping their clients sell businesses, then you’re going to have to find individuals that do. Many times people have a comfort level and confidence level in certain individuals and want them to assist regardless of the need. I can only say that I definitely don’t want a foot specialist to perform open heart surgery on me and the same type of logic applies to the specialties and abilities of your key advisers.
Here’s another way of looking at it. If you engage someone to help you that is not well versed in all the ins and outs of a sale transaction, you’re likely going to have an adviser who is going to take an ultra conservative approach in order not to risk making a mistake. When selling a business, you need advisers who are skilled at working through all sorts of issues that can arise. There is definitely an art of the deal and you want to be working with deal makers, not people who have great intentions without the requisite experience. Remember that if the deal falls apart one time or many, they are still going to send you a bill for all the time they spend. So make sure you’re investing in someone that really knows what their doing with respect to selling a business.
Existing advisers tend to have networks of other professionals that can lend a hand in areas they are not focused on. So even if they are not themselves the best resource for you, they could very well lead you to a qualified referral that you can have some confidence in versus starting from scratch.
You may also want to consider working with a business consultant or firm that specializes in business sales support. After all, selling a business is a project management exercise, so unless you’re planning to project manage all aspects yourself, you are going to need some help covering off all the key areas that can kill the deal or destroy value for you.
The use of advisers should be looked at as an investment whereby whatever you pay out for help will provide you with a solid return from the money you get to keep from the sale. So every adviser or service you consider should be able to clearly show you how an investment in their efforts will provide you with a positive return.
If what they offer cannot be easily quantified into real value in simple terms, then pass. Valued advisers understand that they must provide you with a return on your investment to them. Unfortunately, many of these service providers don’t have this mindset, so you’re going to have to weed out the ones that don’t so you’re not wasting time and money.
Remember that having a good team will not only get your business sold faster, but also increase what you put in your pockets.
By starting with the selection process, and putting in the effort towards drafting the right players for your team, you will greatly increase your probability of a successful sales process.
The Key To Successfully Buy or Sell A Business
How To Increase The Chances Of A Business Sale Being Completed
I’ve been on a roll lately talking about business acquisition financing and many of the things that need to be considered to secure this hard to pin down form of financing.
Even if business financing is not required and the buyer can pay in cash, there is still no guarantee the deal will be finalized, although its going to be significantly easier to close without having to worry about securing capital.
So putting sources of funds aside, what is the key to closing the purchase and sale of the shares or assets of an existing business?
In all the deals I have been involved in or observed, I can easily come up with what I believe is the #1 key to success, and that is for the buyer and seller to jointly project manage the deal to its successful completion.
While that may seem a tad obvious to some, here is a better way to describe what I’m trying to say.
The Buyer And Seller Have To Become Blood Brothers.
There I said it. As corny as that may sound, its the best way I can describe not only how important their interaction is with each other, but also the degree of comfort and trust that needs to develop between them during the buy/sell process.
Once the Letter of Intent is signed, they need to get out the hunting knives, draw out a little blood on their palms, and bond the deal.
What this ritual symbolizes is the understanding that has now been forged between the two parties which can be summarized as follows:
- Unless there are unforeseen issues or disclosures that materially impact the deal, both sides are committed to do what it takes to complete the process.
- Both the buyer and seller will retain the decision making power throughout the deal.
- Both buyer and seller agree to discuss the outstanding issues on a regular basis and get involved where necessary to assure progress is being made.
Putting aside issues related to financing or unforeseen events and disclosures, deals fall apart because there are too many cooks brewing the stew.
Both sides will have advisers such as accountants, lawyers, financial advisers, business consultants, insurance agents, etc. The larger the team, the less likely the deal will close without the buyer and seller staying engaged in the process.
Both sides will likely have to deal with a certain number of outside parties dictated by the composition of the deal. This can include licensing agencies, bonding companies, appraisers, environmental consultants, suppliers, customers, employees, unions, and so on and so on. As the number goes up, probability of success goes down.
In essence, the buyer and seller need to project manage their deal to completion. Too often one or both sides do not appreciate what this can entail and the result is the deal can get away from them.
By definition, a project manager understands all the tasks required, how they inter relate, any interdependency among tasks or events, time lines, and so on. Unfortunately for many deals, buyer, seller or both do not get very involved after the initial negotiations have been completed and if anything tend to step back and let the advisers take over.
Aside from project management, both sides also need to remain the decision makers. Deals tend to have a certain amount of twists and turns as the details get pounded out. With every curve in the road, there may require an adjustment or compromise on one side or the other. Advisers can be very good at providing their opinions for issue resolution, but their advise may also end up killing the deal.
As decision makers, the buyer and seller need to receive all valid input regarding various issues and decide if any particular issue is something that can be worked through or an outright deal breaker.
A good example of this is during the drafting of purchase and sale agreements. Each side’s lawyer’s job is to protect their client and get them the best deal possible. When the lawyers from both sides are taking a win/lose approach, trying to out due the other side with clever clauses and demands, the deal tends to go back and forth until the eventual impasse is created.
Its at this point where the buyer and seller have to look at the areas of disagreement, consider all advise, and make their own decision as to how an issue or issues will be resolved.
I’ve seen sellers overly disconnected with the process through up their hands and say, “I’m not a lawyer, so if my lawyer says it has to be this way or that, I have to go along with what he says”, basically making the lawyer the decision maker.
A blood brother to the deal would seriously consider what their lawyer has to say, talk to the other side if appropriate as well as other advisers that could add value to the situation, and then make their own decision whether to proceed or not.
If buyer or seller agrees to proceed against an adviser’s advise, the adviser involved must then find a way to make the deal work (be a deal maker) in keeping with the wishes of the person paying their bill.
This is one of the more common points where deals blow up, but there can be many others. As the number of people involved goes up, so do the levels of inaccuracies and misunderstandings that occur not to mention the lengthening of time lines.
And remember, most if not all the advisers are getting paid whether the deal gets done or not, so it truly is in both the buyer’s and seller’s interests to stay on top of what’s going on.
Obviously no amount of involvement can guarantee success, but the odds are greatly increased when the coordination of the overall project details are being well managed, the misunderstandings are kept to a minimum, and the advisers are directed to find ways to make the deal work versus blowing it up.
Business Acquisition Financing | The Devil Is In The Details
Attention To The Details Can Make Or Break Your Quest For Business Acquisition Financing
Arguably one of the most difficult forms of financing to secure is business acquisition financing.
The degree of difficulty has a lot to do with the fact that many business acquisitions of small and medium sized businesses fail after the change of control takes place, making financiers more Leary of this type of business financing request.
But don’ t despair if you’re in the process of trying to locate and secure capital for an acquisition. Financing is available and there is a solution for making sure that you get your hands on the money you need.
Simply put, you need to make sure that you’re focused on the details of the deal.
A lender or investor considering advancing capital for a business acquisition want to see that all change of control issues are properly addressed, all risk areas are covered off, and that there is a solid plan of action going forward led by a well informed and competent individual(s).
Basically, they really are going to get into the details.
- Can all customer and supplier contracts be transferred or assigned to the buyer?
- I s there sufficient working capital in place to operate the business and allow for contingencies?
- Is there any outstanding litigation that could impact future business?
- Will the seller provide support and training?
- Are there at least 2 years of financial projections (income statement, balance sheet, and cash flow) that are based on sound and supportable assumptions and also logically bridge from past performance?
- Will there be any assignment of existing debts?
- Are government remittances up to date if its a share purchase?
- What is the orderly or forced liquidation value of the equipment?
- If there’s real estate, what’s the appraised value and has there been a recent environmental assessment made?
And so on, and so on, and so on.
Basically, the details. Could be just a few… likely more in the line of several pages.
And in many cases, potential financiers are asking you to provide your due diligence assessment of all the things you should be worried about anyway regarding the proposed purchase, which can actually be viewed as a good thing.
After all, no buyer wants to invest their hard earned money and time on a failed venture. While there is never a guarantee of success as anything can get screwed up or get blind sided by unexpected events, covering off the obvious issues right in front of you is a good starting point on the road map to success.
Unfortunately, many prospective buyers don’t sweat the details and at times want to dive right in where angels fear to trend. And that’s exactly why they don’t get any financing.
The details can be a real pain. It takes time to deal with. It costs money to work with qualified advisors.
But the risk of not sweating even the smaller stuff can be catastrophic in nature when you’re trying to take on a business that you have never operated and will have much to learn about in the early going of ownership
Securing Capital Can Be All About The Story
Telling A Good Cohesive Story Can Make The Difference Between Securing Capital or Coming Up Short
When going through the process of securing capital, don’t underestimate the power of a good story.
Even though any application for business financing is going to focused on the numbers, the actual background story is what ties everything together and can really make or break the deal.
When looking for business financing, the back story has three basic components: How we got here; exactly where we are right now and why we need more money; our plan to manage the business on a go forward basis and provide a return on the capital we are seeking.
From a numbers point of view, the story needs to tie past, present, and future together seamlessly. To often, the write up that accompanies an application is disjointed from past through future, leaving the reader scratching their heads and becoming less enthused with the deal by the minute.
As an example, the future projected financial statements do not reconcile properly with historical results, leaving gaps in the logic that was used to create them. If there is a logical reason to make radical changes to the future expected results, then significant explanation and support needs to be included.
Moving from the quantitative to the qualitative, one of the key components of any good story is a description of the management team, their individual and collective experience including their track record of previous successes related to helping other organizations meet or exceed their goals and financial expectations.
When it comes to securing capital for acquisitions or start ups, as much as 70% of the overall lender or investor decision making criteria can be based on the strength and abilities of the management team as well as their stated plan for moving the organization forward.
In many cases, deals are pressed for time and the story either gets passed over completely or grossly minimized in order to save time when getting something in the hands of the capital provider to assess.
The feeling can be “just get me in front of the lender or investor, and I’ll tell a brilliant story”. While a great presentation can have a major impact, there are at least three reasons why something in writing at the start should not be overlooked or simplified.
First, the written story with the initial information package serves as a first impression that actually gives you the opportunity to make a killer presentation.
Second, by providing a well written story that ties everything together, management is demonstrating their skill and knowledge, further adding to the credibility of the deal.
Third, a presentation that effectively works off of and expands the written story demonstrates that the individuals asking for the money actually were involved in the written plan versus something that was outsourced to a gifted business plan writer who knows how to hit all the hot buttons and strategically embellish certain things to create a more effective marketing piece.
When I worked as a lender, I had a rule that the larger the deal, the more often I would need to interview the key participants over a period of time. The key reason why I did this was to make sure the story held together.
In the initial stages of a deal, the higher potential applicants tend to be very well prepared and well polished when delivering their story. By requiring several impromptu discussions, my goal was to see if the story stayed the same under circumstances where every word was not measured and excessively rehearsed.
Not surprisingly, many cases could not hold water over time. Their stories developed holes and inconsistencies which ultimately signaled a lack of disclosure and/or a lack of a solid plan.
For those that did hold together, the business financing decision became much easier to make in their favor.
Without a solid story, securing capital can be very challenging indeed.
Business Finance Considerations For Year End
Business Finance Planning Involves More Than Taxation At Year End
Being that we are now in the first week of December, many business owners with December 31st year ends will be or should be projecting what their financial statements will look by the end of the month in order to have the opportunity to improve the final results in the coming weeks.
Traditionally, a year end planning process is for taxation, and taxation purposes only. While tax planning is definitely something that should be seriously looked at this time of year if you have a December year end, there is another aspect of business finance that is mostly overlooked in the process by both business owners and their accountants.
The year end financial statement that typically gets prepared up to 6 months past the end of the actual year end, is a very important and arguably the most important element of a business financing package for an existing business.
Sometimes in the pursuit of reducing income taxes at any cost, business owners create other problems for themselves in the areas of securing capital or maintaining the capital they now have access to.
For an oversimplified example, business financing problems can be created by income statements that show no or low profitability and balance sheets that show no or low retained earnings.
In many cases, year end tax planning activities will occur to either spend more on future needs to reduce the net tax position at year end or move profits out of the company to optimize both the business and personal income tax positions of the owner(s).
While these types of actions may very well result in considerable taxation savings, they also end up painting a less than flattering financial picture for the business for the period just completed.
Logically, one could argue that lender or investor would be able to understand these actions and take them into consideration when reviewing the financial statements. Unfortunately, logic doesn’t have much to do with it. The financial statements are in almost all cases related to business financing, taken at face value.
As a result, two potentially negative outcomes can occur.
First, for the business that currently has business financing facilities in place that require specific financial covenants to be upheld, the year end tax planning activities can potentially cause a business not to meet some of the covenants which could result in the lender calling in the loans or taking some type of corrective action.
Second, for a business trying to secure incremental capital, the year end financial statements may not show the ability to repay the debt or show a debt to equity position that can support a greater level of borrowing.
Both of the above scenarios can be disastrous to a business, where at the least significant opportunity is forgone, or at the worst, the business cannot cash flow its operations and ends up closing down or going bankrupt.
To avoid both scenarios, the year end planning process, either for a December 31st year end, or for any other year end date, needs to take into account how the final version of the financial statements will impact all business finance aspects of the business (taxation, cash flow management, ability to secure capital, and so on)
To some degree, taxation can actually be looked at as a financing cost, as failure to pay taxes or have taxable earnings, may limit or restrict the business from acquiring and maintaining business capital, especially lower cost debt instruments.
Small Business Financing Is Mostly Personal Financing
What’s The Difference Between Business & Personal Financing
For small businesses, there isn’t much if any difference between the two.
There are a couple of key reasons for this.
From a credit point of view, small businesses, especially new ones, don’t have much in the way of business credit established. So lenders will rely on personal credit scores and histories to make business financing decisions.
Even if a small business has been in existence for several years, there still is no guarantee that any amount of business credit will have been established due to the fact that a business credit history is developed by transacting with companies that not only offer credit terms, but also report outstanding credit to credit reporting agencies. Many small businesses either don’t utilize much supplier credit, or way only work with suppliers that are too small to be actively reporting to credit agencies. The result in both cases is that business credit does not build much over time.
From a guarantee point of view, most small business financing facilities will require a guarantee from either the business itself or the owners of the business. If the business itself does not have sufficient retained earnings to provide meaningful value to a guarantee, then a personal guarantee will be required.
Many business owners get frustrated with the fact that even though they are incorporated, they still have to open themselves up to liability personally by having to provide personal guarantees to secure business loans. Unfortunately, incorporation can be more important for tax reasons than liability protection, especially when it comes to securing business capital.
Over time, as the business earns profits and grows its retained earnings, then personal covenants and guarantees may not be required and can even be removed from existing financing facilities.
The key though is to increase the value of the businesses ability to repay debt obligations. If the owners are always striping out the available cash from the business, then the personal guarantees will likely continue to be required due to the fact that the personal side is where all the equity value is being held.
Business Financing Sources Are Moving Targets
Business Financing Sources Can Be Hard To Pin Down
Most things you try to acquire have some type of regular and predictable supply. Some products and services are readily available while others may require lead time to order or restock. And even if someone goes out of business, there is typically another vendor to work with.
Furthermore, process for acquiring a product or service, the terms and conditions of use and so on, also tend to be easy to locate.
If it was only so easy when it comes to securing capital for your business.
While the vendors may be easy to recognize, the process for acquisition and the determination of availability may be very difficult to figure out.
Lets looking into the key reasons why.
1. Sources of business financing get the majority of their capital for lending or investing from other sources of financing, which can be further leveraged down the line. If the “up line” sources reduce supply or increase the costs, there is a trickle down effect that is very hard to predict at a local borrower level. Sometimes retail lenders are shut down completely because of a major source no longer extending supply.
2. Capital providers manage a portfolio of placed accounts. Portfolios are continuously adjusted based on the economic outlook for different sectors. If a particular sector is becoming too large a part of the overall portfolio to create “risk imbalance”, then the capital source will stop providing new funding for that sector and may even call in loans or sell off what would normally be considered a well performing asset to reduce concentration.
As an example say that a business owner or manager requests construction industry financing in January from a preferred lender and that financing is approved and disbursed. If the exact same request was made 6 months later, there is no guarantee that an approval would be forth coming, which could be based on the industry, overall portfolio risk, and so on. Supply is not going to be constant.
The rules aren’t constant either. Perhaps the same request 6 months later can still get approved, but more security is required or a smaller percentage can be approved, or tighter terms and conditions accompany the approval, or rates are higher to reflect a higher perceived risk.
Total moving target.
3. Humans are involved. While financial companies providing capital have policies and criteria to follow, the decision making process is managed by individuals. When the individuals involved change, the decision outcome can change… even though nothing else may appear to change from one deal to the next. Even if personnel doesn’t change, many lending organizations operate with a rotating desk of underwriters who are assigned applications at random. All things being equal, different underwriters can come up with different lending or investing decisions on the same file.
4. Economic outlook. At the time of writing, we are near the end of 2009 and still in the middle of the current recession. Many business financing sources continue to build their cash reserves to protect themselves against any potential losses that may occur in their portfolio from recessionary impacts. This is quite ironic in that their exact action of building cash ends up shrinking the money supply and creating the exact effects they are trying so hard to guard against. In these situations, supply of capital is not the issue … willingness to supply is.
5. Time Of Year. A financial organization that provides capital for loans or investments operates as a business within an annual business cycle like any other business. At the beginning of a fiscal period, lending criteria tend to be quite tight as organizations see if they can acquire lower risk assets. If by the second quarter, the “placement numbers” are off, the criteria can get loosened up to help meet targets. As the end of the fiscal period draws near, nothing but low risk loans or investments will be considered if the company has already achieved its budget. The opposite would take place if the budget still had to be made.
So when you’re looking to secure business financing, regardless of your previous experiences, remember that your success will always hinge on how all of the above comes together at any point in time. Put things off a couple of months and the rubics cube could look totally different.
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.