If you are hoping to secure equipment financing with bad credit, you should know about the 5 C’s that equipment leasing companies use to evaluate lease applications.
Unlike banks, which evaluate small businesses from a fortune 500 perspective, equipment leasing companies evaluate businesses from a small business perspective. Here are the five C’s that they use to evaluate lease applications.
Equipment Financing With Bad Credit: The 5 C’s
1. Collateral
The amount of collateral that you need to secure a lease largely depends on the equipment leasing company’s policy and the status of your business. A traditional bank may ask you to provide collateral whose value is equivalent or more than the value of the loan you are asking for while a leasing company will normally use the equipment they are leasing to you as collateral.
If you have existing equipment debt, a few lessors will offer you a sales-lease back as a way of refinancing your debt. This allows you to free up capital or even lower your monthly payments through equipment leases.
2. Capacity
Is your company financially equipped to get through bad times? This is especially important for a company that is just starting out. But even so, established companies should also be financially ready to get through bad times or when unforeseen things happen and the company’s cash flow is negatively affected.
Equipment financing companies will look at your capacity to make monthly lease payments using your cash reserves or your ability to convert real estate to cover your debt.
3. Cash Flow
Many lessors want to see that you can cover fixed operating expenses, meet payroll and at the same time make monthly payments on your new lease. There are a number of ways to define cash flow but many lessors calculate the amount of money available to make lease payments as net profit plus other non-cash expenses such as depreciation and amortization.
4. Credit
Credit reports produce the following information:
- Your company’s ability to pay trade accounts in a timely manner
- Judgments, liens, suits and any other public records that can negatively affect your credit rating
Credit reports also show UCC filings. Potential equipment lessors look at the depth of your company’s borrowing history. If your business has been in operation for more than two years, it will be much easier for a leasing company to determine credit stature.
A company that’s been in operation for more than ten years with a good credit history obviously has more weight than a startup that’s less than two years old. Your credit score will also dictate the lease rate that you get. Typically, a company with a damaged credit score will attract a higher rate as compared to one with a good credit score.
5. Character
Every equipment leasing company wants to know what type of a company they are dealing with. If your company has been in operation for a minimum of three years, your credit and payment history will reveal your attitude towards making timely payments and managing debt.
How you manage your financial obligations is the most reliable indicator of your likelihood to make timely payments. These are not financial obligations that you have towards your company but your personal ones. No matter how solid your business plan is, your lessor may still want the assurance of a personal guarantee from you.
6. Common Sense
As a bonus, the sixth C has been included and it is simply common sense. Every decision to approve a lease is based on common sense. The lessor will want to know how adding more equipment will improve your business. The foundation of any equipment lease starts and ends with common sense.
Equipment Financing With Bad Credit
As you can see, it’s not only your credit that will determine if you will get approved for a lease. A lot of factors must be considered when assessing your eligibility for a lease. The five C’s should give you an idea of what a leasing company looks for when reviewing your lease application. Leasing companies and banks have different perspectives of the five C’s and you have a higher chance of being approved for a lease if you have damaged credit as opposed to a loan.
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