Equipment Financing and the Five Cs of Credit Evaluation

Equipment Financing and the Five Cs of Creditten- or twenty-year credit history obviously carries
Evaluationenormous weight. This places a startup company less
Sean Marten - Senior Credit Analyst, Crest Capital - 9than two years old at a disadvantage. So, when
4/2007traditional data sources, such as Dun & Bradstreet
Equipment financing lenders, as well as banks, use theand Paynet cannot supply adequate information, the
Five Cs to evaluate loan applications: Character,personal credit histories of a company's owners
Credit, Cash Flow, Capacity and Collateral. However,become highly important.
while banks look at small-to-medium size companiesCash Flow - Lenders want to see that any company
from a Fortune 500 perspective, equipment financingapplying for a loan earns enough money to meet
companies see applicants from a small businesspayroll, cover fixed operating expenses, and
perspective, which highlights a sixth C: Commoncomfortably make timely payments on a new
Sense.equipment loan or lease. While there are a number of
Here is what a lending institution means whenways to define cash flow, lenders most often
referring to the Five Cs:calculate the cash flow available to repay new debt
Character - Every lender wants to understand whatas net profit plus such non-cash expenses as
type of borrower an applicant will be in order toamortization and depreciation.
make smart, safe credit-granting decisions. The longerCapacity - Capacity is similar to a football team's
a company has been in operation, the more itsdepth chart. The capacity to weather bad times is
payment history and outstanding credit revealequally important to a company seeking funds.
management's attitude toward debt and makingCapacity acknowledges that sometimes unforeseen
timely payments. Public records and references canthings happen: a key employee becomes unable to
come into play; still, the most reliable yardstick is thework; a major customer is lost; an economic
character of a smaller company's owners. How theyturn-down drastically reduces demand for product or
manage their personal financial obligations is usually aservices. Any number of other unlikely - yet possible
reliable indicator of the likelihood of their making- disruptions can negatively affect a company's cash
timely payments. The more closely held a company,flow. And these disruptions can be temporary or
the more attention given the personal credit historypermanent. So, capacity measures a company's ability
of those in charge and their prior business history. Noto pay off an equipment loan or lease with cash
matter how solid a business plan appears and howreserves or its ability to quickly convert real estate,
reliable a company's owners have been in the past,stock, or other assets into enough funds to cover
the realistic lender also wants the assurance ofdebt.
personal guarantees from the company's owners.Collateral - How much collateral, above and beyond
This may take the form of a signature or a pledgethe equipment being financed, a company needs to
of cash or other collateral.secure a loan or lease depends largely on the nature
Credit - Business credit reports offer a quick glanceof the lender and status of the business. A traditional
at a company's willingness to pay trade accounts onbank often requires a blanket lien on all assets of the
time, as well as any derogatory public records, suchbusiness while an equipment finance company
as suits, liens, or judgments that negatively affect anormally uses only the equipment for collateral. A few
company's credit rating. Such reports also show anylenders also offer sale-leasebacks and refinancing of
UCC filings. Potential equipment lenders are interestedexisting equipment debt. This allows a company to
in the depth of a business's borrowing history. Thefree up cash flow or lower their monthly payment
longer a company has been in business, the easier itthrough equipment loans or leases.
is for a lender to determine credit stature; a good