The recession has changed financial markets and financing in general. Doing business as usual has been sharpened quite a bit and understanding the playing field will help complete your funding requests faster and mitigate some of the frustrations that can arise during the process. There are myths and misconceptions about the approval process and new ones that have cropped up with the changed landscape that require some clarification. Let’s see.
Myth 1: Lenders no longer lend, only perfect credit gets money.
This is not true; Although the US lender market, the total number of lending institutions, has shrunk in the US, many of the still active institutions have not drastically changed their lending criteria. The same underwriting guidelines are still in effect; it’s just that insurers are now more thorough in their background audits and reviews. Time in business, bank accounts, income and trade sources are all carefully checked to make sure everything is true and accurate.
The real problem is that since so many companies have had significant business losses with reduced revenue, they are not approved due to poor performance. When things got better, they got quick approvals with good rates, but with declining financials they were either turned down or a conditional approval with higher rates because of the increased risk. This scenario falls back on the nature of lending: interest and approval equals risk.
Myth 2: If my bank rejects me, everyone else will too.
Not true; banks have specific guidelines under which they operate. The US banking system is the most regulated in the entire world and therefore flexibility with an individual customer or company just isn’t there. If your bank rejects you, you can apply directly to a finance company or to the captive finance the seller offers. Finance companies and captive lenders are motivated to get your hands on the equipment and approve your request because they don’t get paid unless you get approved, so the motivation is there. They also operate under less strict guidelines, and if your credit isn’t perfect, you can still get approved. Moderate credit will require you to pay more interest, but at least you have an opportunity to continue with your business plan. It’
Myth 3: Insurers are just looking for problems with my credit to turn me down.
Underwriters are tasked with accessing risk and if they approve funding, ensure that it is repaid in full. Determining risks is their job and finding hindering problems is exactly what they focus on. If you are concerned and have not checked your credit report in the past 3 months, please request a copy before submitting your application. You can get a free copy of your credit report once every 12 months from the three major credit bureaus (Experian, Equifax and TransUnion) at http://www.annualcreditreport.com .
Check your own creditworthiness and Dunn and Bradstreet reporting and ensure that it is accurate and that errors are corrected immediately. This allows you to solve problems before anyone looks at your past. Handling issues after the underwriter has started their process is not as effective because your file is now “pending” and not given the same priority. Underwriting wants to approve your request, but the current snapshot of your business and history must all make sense and the risk must be 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 not all leases are created equal. Different states have different guidelines, but in general, 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 wishes to keep the equipment, it must pay a fair market value of that asset, as determined by the lender. If the market value is set by the lender at the start of the lease, there is no question of a market-based lease. This area can be accounting complex, but keep in mind that not all leases are tax deductible. If this is an important buying point for you, check with your accountant before signing your contract, as the IRS has defined standards about what constitutes a “true” lease.
Myth 5: It’s better to use my bank than the seller’s financing.
Not always the case. Business owners should consider captive finance companies (provided by equipment suppliers) rather than their local commercial bank. The main benefit of working with a captive finance company is industry knowledge; the staff understand the industry and the equipment being funded. They can advise you on the best financing structure for your business and based on the equipment. The goal of captive financing is to increase sales volume for the affiliated equipment company while making careful underwriting decisions. The captive finance company has more incentives to make the deal happen than your local bank and if there is motivation, there are often better results.
Financial markets have changed as a result of the recent recession, but many of the same lending basics still apply. Understand the players and be thorough when preparing your financial documents so that you are likely to get a quick approval at the best rates. If your business has taken a downward turn, evaluate whether it’s worth getting a higher rent or loan or just waiting for your business to stabilize before adding more debt.