Financing/Leasing

Five Steps to Consider Before Applying for Credit

Knowing how to prepare your company prior to seeking financial sources can be the difference between success and failure.

Caleb Boyd

In today’s volatile financial environment, finding a lending source capable of meeting your equipment purchasing objectives can be a daunting task. With access to capital shrinking and delinquencies on the rise, lenders have been forced to tighten up their underwriting standards or exit the marketplace altogether. This can be problematic for owners of waste hauling companies who find themselves unable to purchase the vital equipment necessary for growth and sustainability. Knowing how to prepare your company prior to seeking financial sources can be the difference between success and failure. Following are some practical steps to consider before applying for credit.

#1: Know Your Strengths and Weaknesses

Let’s face it; credit is very personal. Most companies have a very different view of their credit than is perceived by their lender. No matter how much you have convinced yourself that your credit is perfect, it is important to be in touch with reality. The best way to know which credit options are available to your company is to know both your strengths and weaknesses as an applicant. Before calling up a potential lending source, be prepared to adequately explain your current credit condition. Since most lenders will be pulling your credit reports anyway, it is in your best interest to be upfront and honest with your current credit situation. If your personal or business credit has taken a hit in the past, be equipped to explain any derogatory items on your credit reports. Your business may have experienced a period of slowness several years back, but you have since made some organizational changes that have improved cash flow. Maybe your personal credit score has declined in recent years but you have a personal financial statement to provide showing positive net worth. Be upfront with your lender so they can determine if you are pursuing the right source or simply wasting your time.

#2: Be Financially Prepared

Credit goes far beyond a simple credit score (although this is a good start). Lenders are looking for businesses that are established, financially solvent, profitable and able to handle comparable debt. More importantly, they need to be able to adequately verify this information. Finance companies that approved loans based solely on an application prior to the recent credit crisis are now requiring complete financials to support loan requests. While your company may be experiencing its best year yet, not being able to show this on paper will substantially limit your company’s ability to obtain credit approval. Furthermore, favorable financials can often overcome deficiencies in other areas of your credit review such as a mediocre personal credit score, lack of comparable credit references or limited time in business.

At a minimum, lenders will want to see two years accountant-prepared financials along with a year-to-date profit and loss and balance sheet. For business owners in the waste industry, staying on top of the books can be a real challenge in the midst of intense daily work demands, yet it is extremely important not only for acquiring credit but for providing you with valuable feedback regarding the performance of your company. If you do not currently keep internally prepared financials, consider purchasing some accounting software or hiring a skilled bookkeeper. If you have the tendency to procrastinate on your year-end taxes, make it a priority to get them done on time this year. Do you know how much your business is making in revenue and spending in expenses? Do you have a projection of what your business will make in the coming year? The better you know your business and support your request with well-prepared financial information, the better success you will have getting approved.

#3: Know Your Purpose and Justification

Another critical component to loan underwriting is having a strong purpose and justification for purchasing the asset you are looking to finance. Underwriters are looking for any information to support a request and much like good financial information this can often overcome weaknesses in other areas. For a small garbage hauler, the reason for purchasing a new rear-load truck may be as simple as keeping up with a growing customer base. However, in some cases the purchase is associated with a fixed revenue stream such as a multi-year municipal contract. For a C&D recycling operation, the purchase of grinding equipment may be needed to reduce landfill costs or generate an additional revenue source. Being able to effectively communicate the reason for your equipment purchase will help a lender feel more comfortable about extending credit and it will also show that you are more than capable of paying back your debt. If you have any significant work references, consider providing contact information or a copy of a contract that will further support your request for financing. If a particular equipment purchase will increase revenues or reduce costs, consider providing these figures to your lender.

#4: Choose the Right Lending Source

Finding the right source for your equipment financing needs can be very challenging. With a wide range of finance companies to choose from, knowing what distinguishes one finance company from another can save you both time and money. The first distinction you should be aware of is the difference between a “direct lender” and a “broker.” Direct lenders are bank-owned and capable of funding their own loans, while broker lenders fund from a secondary source since they are unable to write their own paper. Naturally, choosing a direct lender almost always ensures that you get the most competitive terms for your equipment loan since there is no middleman. Not only will you get the very best rates and terms, but you will avoid having your credit report pulled by multiple sources which can negatively impact your credit score. Also, since direct lenders are tightly regulated they are held to a higher level of scrutiny when it comes to customer disclosure so there are typically no hidden surprises. Direct lenders should always be your first option, but keep in mind that the credit requirements tend to be more conservative than a broker. Brokers may offer a level of convenience and lenient underwriting not offered by bank-owned sources, but be prepared to pay for this.

Another feature to look for is industry experience. Lenders that are familiar with the waste industry are better suited to understand your specific business needs as a waste company, as opposed to a local bank that may be apprehensive about financing a piece of equipment they have never heard of. Industry-focused lenders are also taking on less risk when financing a piece of equipment, since they have a portfolio of customers in that industry to re-market to in the event of a default. Talk to other industry professionals or dealers selling the equipment for the best recommendations. Dealers will not only have a list of trusted lenders but they may also be able to provide special financing programs due to the volume of business they refer to a particular lender.

#5: Read the Fine Print

Before signing on the dotted line, make sure you are aware of all the terms and conditions of the loan. When quoted an interest rate, make sure it is the true yield of the loan (not a “running rate”) taking into consideration any advanced or balloon payments required by the lender at closing. Ask for an amortization schedule with the rate so that you can verify all the terms are accurate. If you anticipate paying off the loan early, make sure you are aware of any pre-payment penalties associated with the contract. You should also be cautious of “blanket” language included in your loan documents. It is very common for a lender to include a blanket lien in your contract, which places a first lien priority interest on all your equipment “now owned or hereafter acquired.” These liens can restrict your ability to buy or sell equipment in the future which may be problematic.

In conclusion, keep in mind that the terms quoted to you by your lender are rarely set in stone. As a potential customer in a down economy, you have a lot of negotiating power. With fewer deals out there, representatives selling equipment loans will bend as much as possible to ensure a deal gets booked. If lowering your interest rate a quarter point or modifying a pre-payment penalty will ensure your loan representative gets the deal closed, don’t be surprised if they go out of there way to make you a happy customer.

Caleb Boyd is a top-producing regional sales manager for the Environmental Equipment Division of Center Capital Corporation, a subsidiary of Webster Bank. Based out of Farmington, CT, Center Capital Corporation has been providing competitive, industry-focused financing solutions to the waste industry since 1987. Caleb can be reached at [email protected] or visit www.centercapitalcorp.com.

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