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Equipment Financing and the Five Cs of Credit Evaluation

By : Sean Marten 

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. 

Crest Capital is a commercial equipment financing and business equipment leasing company with offices in Alpharetta, GA

Get Extra Cash By Refinancing

by: Melissa Kellett

There are many ways of consolidating debt. One of the smartest, though, is to refinance your home mortgage and use the extra money you can get out of your home equity to cancel other debts. 

Benefits Of Refinancing 

When you refinance your home mortgage you obtain a loan in order to pay off the existing one. This is beneficial especially if the new loan presents either a lower interest rate or a longer repayments schedule. In any case, the applicant will be able to reduce his monthly payments considerably. 

By refinancing you will also be able to request a higher amount than the remaining of the outstanding loan and thus obtain extra cash from the equity you have built on your home. These refinance loans are known as Cash Out Refinance Loans and the surplus can be used for many purposes. However, you can raise your credit score and improve your credit history by using it for eliminating debt by paying off a certain amount of the remaining debt, especially high interest debt. 

When To Refinance 

If you think that refinance might be a good option for you to consolidate debt, you should pay special attention to the interest rate and the loan amount since these two issues will determine whether refinancing your home loan is convenient or not. A lower interest rate with a similar repayment program would lower your installments and thus you would have extra money for repaying your debt sooner. The same thing can be achieved if you can get a higher loan amount. 

If you can obtain a lower interest rate by refinancing your mortgage, if you can get a longer repayment schedule and thus lower monthly payments or if you can get all the extra money you need by refinancing for a higher amount, then refinance is the right option for you. 

If none of these benefits can be obtained by refinancing your home loan, then you should reconsider refinancing. There are other options like unsecured or secured personal loans and home equity loans and lines of credit that can help you consolidate your debt. You should also check when considering refinancing that the previous home loan does not have a prepayment penalty. Otherwise you might loose all the money you were going to save by refinancing your mortgage. 

How To Find The Right Lender 

Finding the right lender that will offer you the best deal on your refinance home loan is the key issue when it comes to refinance. The smartest way to go is to search online; there are some online companies that offer access to many lenders dealing with mortgages and refinance mortgage loans where you will be able to obtain free quotes and compare them in order to make a conscious decision. Refrain from contacting realtors to get advice on refinance home loan lenders. The truth is that it is not their area of expertise and they usually have agreements with lenders that will turn your refinance loan more onerous. If you want to get the best deal available you should shop around and compare rates.