How to get your financing approved

How can you put yourself in the best possible position to get the financing you need? Understanding the five key process variables can lead to a quick, smooth application process.

Once a potential lending source is identified, the next task is making a submission that will actually get approved. The following are five variables that a lease finance company looks at when reviewing applications:

1. Asset Quality

The first thing any lender will look at is what actually is being financed. When it comes to machine tools, anyone with industry knowledge will know that a quality, brand-name machine tool has excellent resale value.

When looking at it from the lender’s perspective, the first concern always is an exit strategy in the event a deal goes bad. They want to have a comfort level in knowing the asset can be resold with relative ease, recovering a significant percentage of the outstanding balance.

In many cases, getting financing for a high-value asset can help mitigate a company with a weak credit profile, meaning the lender is more likely to approve an application for a top brand-named machine tool, even if the borrower’s financial profile is not a complete match for the transaction size.

2. Vendor/Seller

Every lender has a process for approving equipment vendors. Typically, lenders look for machine sellers that ask for most of the machine’s payment before or upon delivery.

From the lender’s perspective, it needs to be satisfied that the equipment will be delivered when payment is remitted. This process also includes a review that ensures the seller is reputable and can provide service and support for the equipment, either as an authorized dealer or experienced reseller.

3. Good Story

Every lender’s first question is “Why?” They want to know why the equipment is required. I typically prepare a complete write up for my credit underwriters detailing the motivation behind the funding request.

When I submit a request for funding, it normally involves one of three stories. First, the shop needs to upgrade its outdated machinery with newer technology. Second, the shop requires a more reliable machine because it is tired of breakdowns and delays that cost money and upset customers. Or third, the shop is a growing business that has landed more work and does not have the capacity to keep up.

Usually, new technology provides more efficient methods for production. Not only does new technology add capacity, it also enables better productivity as well, which ultimately translates into increased operating profits. These are exactly the types of stories that get the attention of lenders.

4. Appropriate Amount

A question I get all the time is how big of a financial transaction I can handle. The reality is that the transaction size is limited only by the applicant’s credit profile.

The funding that any lender has available essentially is limitless, however, it is the applicant’s credit profile that determines how much money will be made available.

It is very important to make a realistic request and not one that is far beyond what can be repaid. Lenders review the borrower’s working capital and cash flows to see if it is handling its current obligations or expenses before adding anything new.

Another factor that gets reviewed is a company’s debt-to-equity ratio, a financial ratio that indicates what proportion of equity and debt the company is using to finance its assets. A higher debt-to-equity ratio indicates more creditor financing (bank loans) is used than investor financing (owner/shareholder), which is not viewed positively.

Last, retained earnings, the profits retained by the company that are reinvested in the business and not paid out as dividends, as well as tangible net worth, the sum of all the tangible assets (cash, equipment, and property) less any liabilities (which basically represents the supposed liquidation proceeds a company would fetch if its operations were to cease) also are calculated.

Basically, the higher the value the company can demonstrate on paper, the more money a lender will make available.

5. Financial Statements

I always advise my clients to use a registered accountant (member of CPA) from an accounting firm rather than a tax service when preparing documents for a lender to review. The difference in the quality of the statements is substantial, and a well-prepared report provides confidence to the lender that the numbers disclosed are, in fact, accurate.

Three types of financial statements exist: notice to reader, review engagement, and audited. The larger the financial request, the more detailed the financial statements need to be. Also, internally prepared statements, called interims, which show the current financial year, may be required if the accountant-prepared statements are more than six months old.

As you can see, a lender considers several factors when it reviews an application, so understanding what they want to see when making a submission provides the best chance of for approval. This is particularly important in the manufacturing industry because typical transactions require a considerable amount of money because of the nature of the assets being financed.

Ken Hurwitz is vice-president of Equilease Corp., 416-499-2449, ken@equilease.com, www.equilease.com.