| Equipment Financing and the Five Cs of Credit | | | | is for a lender to determine credit stature; |
| Evaluation | | | | a good ten- or twenty-year credit history |
| | | | obviously carries enormous weight. This |
| Sean Marten - Senior Credit Analyst, Crest | | | | places a startup company less than two years |
| Capital - 9/4/2007 | | | | old at a disadvantage. So, when traditional |
| | | | data sources, such as Dun & Bradstreet and |
| Equipment financing lenders, as well as | | | | Paynet cannot supply adequate information, |
| banks, use the Five Cs to evaluate loan | | | | the personal credit histories of a company's |
| applications: Character, Credit, Cash Flow, | | | | owners become highly important. |
| Capacity and Collateral. However, while banks | | | | |
| look at small-to-medium size companies from a | | | | Cash Flow - Lenders want to see that any |
| Fortune 500 perspective, equipment financing | | | | company applying for a loan earns enough |
| companies see applicants from a small | | | | money to meet payroll, cover fixed operating |
| business perspective, which highlights a | | | | expenses, and comfortably make timely |
| sixth C: Common Sense. | | | | payments on a new equipment loan or lease. |
| | | | While there are a number of ways to define |
| Here is what a lending institution means when | | | | cash flow, lenders most often calculate the |
| referring to the Five Cs: | | | | cash flow available to repay new debt as net |
| | | | profit plus such non-cash expenses as |
| Character - Every lender wants to understand | | | | amortization and depreciation. |
| what type of borrower an applicant will be in | | | | |
| order to make smart, safe credit-granting | | | | Capacity - Capacity is similar to a football |
| decisions. The longer a company has been in | | | | team's depth chart. The capacity to weather |
| operation, the more its payment history and | | | | bad times is equally important to a company |
| outstanding credit reveal management's | | | | seeking funds. Capacity acknowledges that |
| attitude toward debt and making timely | | | | sometimes unforeseen things happen: a key |
| payments. Public records and references can | | | | employee becomes unable to work; a major |
| come into play; still, the most reliable | | | | customer is lost; an economic turn-down |
| yardstick is the character of a smaller | | | | drastically reduces demand for product or |
| company's owners. How they manage their | | | | services. Any number of other unlikely - yet |
| personal financial obligations is usually a | | | | possible - disruptions can negatively affect |
| reliable indicator of the likelihood of their | | | | a company's cash flow. And these disruptions |
| making timely payments. The more closely held | | | | can be temporary or permanent. So, capacity |
| a company, the more attention given the | | | | measures a company's ability to pay off an |
| personal credit history of those in charge | | | | equipment loan or lease with cash reserves or |
| and their prior business history. No matter | | | | its ability to quickly convert real estate, |
| how solid a business plan appears and how | | | | stock, or other assets into enough funds to |
| reliable a company's owners have been in the | | | | cover debt. |
| past, the realistic lender also wants the | | | | |
| assurance of personal guarantees from the | | | | Collateral - How much collateral, above and |
| company's owners. This may take the form of a | | | | beyond the equipment being financed, a |
| signature or a pledge of cash or other | | | | company needs to secure a loan or lease |
| collateral. | | | | depends largely on the nature of the lender |
| | | | and status of the business. A traditional |
| Credit - Business credit reports offer a | | | | bank often requires a blanket lien on all |
| quick glance at a company's willingness to | | | | assets of the business while an equipment |
| pay trade accounts on time, as well as any | | | | finance company normally uses only the |
| derogatory public records, such as suits, | | | | equipment for collateral. A few lenders also |
| liens, or judgments that negatively affect a | | | | offer sale-leasebacks and refinancing of |
| company's credit rating. Such reports also | | | | existing equipment debt. This allows a |
| show any UCC filings. Potential equipment | | | | company to free up cash flow or lower their |
| lenders are interested in the depth of a | | | | monthly payment through equipment loans or |
| business's borrowing history. The longer a | | | | leases. |
| company has been in business, the easier it | | | | |