What your lender looks for in your application

Now that we are through the holidays, and with the hopes that 2021 will bring some sort of normalcy, I thought it would be a good idea to give some insight into what lease finance companies look for when reviewing applications.

While many factors are analyzed, following are the top four.

1. Asset Quality and Seller.

The first thing lenders look at is what is being financed. When it comes to machine tools, lenders that have good industry knowledge know that a good, brand-named machine tool has excellent resale value.

The first concern from the lender’s perspective is exit strategy in the event that a deal goes bad. The lender wants a comfort level of knowing that the asset can be resold with relative ease, recovering a significant portion of the outstanding balance.

Lenders also review the vendor (machine seller) to ensure it is reputable and can provide service and support for the product, either as an authorized dealer or as an experienced reseller. It does no one any good if the buyer is unable to make parts and, in turn, revenue because the equipment is obsolete or outdated to a point that spare parts and service are no longer available.

2. A Good Story.

Every lender’s next question is why the equipment is required. A lender always prepares a proper write-up for credit analysts detailing the motivation behind the request.

To be honest, I normally hear one of these three stories.

The first group are shops that have outdated machinery that needs to be upgraded with newer technology because they are tired of breakdowns and delays, which cost money and upset customers. The second group are growing businesses that have landed additional work and do not have the capacity to handle it. The third group usually has discovered a more efficient method for production that requires new machinery.

3. Appropriate Amount.

A question I get all the time is about how big of a transaction lenders can handle. The reality for most lenders is that the transaction size is limited only by the credit profile of the applicant making the inquiry.

The amount of funds that a typical finance company has available is, for the most part, limitless. It is the equity box of the borrower that determines how much money is available to them. It is very important for borrowers to make a realistic request and not one that is far beyond what they can afford.

Lenders review the borrower’s working capital and cash flows to see if the shop is handling its current obligations and expenses before adding any new debt. This debt-to-equity ratio is a financial ratio indicating the proportion of equity and debt the borrower is using to finance its assets. A high debt-to-equity ratio indicates more creditor financing (bank loans) is used than investor financing (owner/shareholder) and will not be viewed as a positive.

Last, a lender will look at a borrower’s retained earnings, the profits retained by the company that are reinvested in its core business and are not paid out as dividends, as well as its tangible net worth, the sum of all the tangible assets (cash, equipment, and property) minus any liabilities, which basically represents the liquidation proceeds a company would fetch if its operations were to cease.

Basically, the higher the value the borrower can show on paper, the more money a lender makes available.

4. Financial Statements.

I always recommend to my clients that they use a registered accountant from a quality accounting firm as opposed to simple tax services that are less expensive. The difference in the quality of the report is substantial, and a well-prepared report provides much more comfort to potential lenders.

Three types of financial statements are Notice to Reader, Review Engagement, and Audited. The larger the amount of requested funding, the more detailed the financial statements need to be. Also, internally prepared statements for the current financial year, called interims, also may be required if they are more than six months old. Most of my clients use QuickBooks or Simply Accounting to generate interim statements. These are quite easy to use and will keep track of the current year’s performance.

Finding the Right Lender

Manufacturers should spend some time researching the right lender for their needs.

Most commercial bank accounts are set up where the potential borrower’s bank account is, but that is not always the best place for the commercial business.

Canadian manufacturers are in a very specialized and highly competitive business, so their lenders should have a good understanding of the industry to provide proper service.

Normally when businesses are new, they don’t have a lot of banking services available to them, or required for that matter, so any local bank branch can supply what is needed. However, as the business grows and its banking needs increase, it can become much more difficult to remain at the same bank.

I recently landed a new manufacturing client because the chartered bank where it had a long-standing relationship would not give out a loan or lease for a new piece of equipment without making changes to its operating line. The lender also insisted on charging a fee just to review the application.

This is why it is very important, particularly when the bank is having difficulty lending to a manufacturer, to find an alternative source who “gets it” and specializes within the industry. Even if the banker provides funds easily, it is still important to have options. I tell all my clients that just like they have more than one customer, they also should have more than one lender.

A lot goes into getting an application approved, particularly in this industry where the typical transaction is a significant amount because of the high cost of machinery. To have success in finding the right lender, it is important to understand the process of evaluating an application.

Ken Hurwitz is senior account manager, Blue Chip Leasing Corp., 416-614-5878, www.bluechipleasing.com.