What to Do: When applying for a loan – be it for working capital, financing a property, obtaining equipment to grow your business, or any other legitimate reason, borrowers need to present a picture of a healthy company and be prepared to explain any negative operating results that it has shown. As lenders have seen that collateral values have not held up as they thought in the past, the most important thing a company can show is that it has been generating sufficient cash flow from the business to pay back the loan. That is basic commercial lending that has been ignored in too many cases. If a company has shown a loss but it was due to a one-time event, this should be noted right up front. Some lenders are clearly more open-minded than others and will add back one-time charges when measuring a company’s debt service ability, while others who may only look at the bottom line may not.  There are many lenders out there, so if the first lender is too rigid in its ways, follows a strict underwriting criteria,  and does not leave any room for discussion, you should move on to another lender. You need to find a lender that is willing to work with you and understand your business. When borrowers are as forthcoming as possible, providing all the information that is needed for the lender to make its decision- tax returns and financial statements, a good explanation of what the loan request is for and how it will help the business grow, an explanation of any one-time events, and be willing to make a down payment so the lender can see that you have some “skin in the game” and are not asking for 100% financing, the odds of approval go up sharply. A business that shows the combination of adequate debt service ability, a clean credit history with prior loans paid on time, and the willingness to put some money in as a down payment, should be viewed as a good risk. If the lender still can’t get over one blemish on a company’s overall credit profile, than this is not a lender that a company should continue wasting its time with.

Ask any product marketing person and he or she will tell you that the easier it is for a customer to financially acquire a new product, the easier it is for the prospective customer to make an acquisition decision–and the shorter the sale cycle.  The shorter the sale cycle, the less chance of losing an equipment sale to a competitor.

Studies show that 9 out of 10 companies now lease equipment.  So, if you have lease financing available at the time you make a product sales presentation, your chances are increased of making the sale.  The real question, then, for a product vendor is how to set up the most effective customer financing program–and a key aspect of that decision is whether it should work with a third-party lessor or set up its own captive leasing operation.

1. What Are the Internal Business Capability Considerations?
A product vendor’s first step in setting up an effective customer equipment financing program is to take into account its equipment leasing management, operational, and financial capabilities, as well as its leasing operation interests.  Depending on the answer, the product vendor will pursue establishing its own equipment financing activity, possibly setting up a captive leasing company, or entering into a relationship with one or more independent leasing companies, something that will be discussed below.  Once that decision is made, the next step is to design a customer financing program that will be responsive to prospective customer financing requirements.  For example, the credit considerations in approaching small business customer equipment financings will be considerably different than those in approaching Fortune 1000 business customers.  Deciding in advance to handle the various requirements is a critical element is maximizing the benefits of offering customer equipment financing.  Nothing is more damaging to product marketing than having to go back to a new prospective customer, after offering equipment financing, and stating that the company does not meet the financing requirements of, say, your third-party lessor–particularly when the reason for the turndown was something that another type of lessor would not have objected to.

2. The Choice Between A Third-Party Lessor and An In-House Financing Setup
As a general rule, having an in-house financing capability, such as a captive leasing company, is the best choice for obvious reasons–you control the financing decision, and the lease documentation.  In addition, an in-house leasing capability is the right choice if you want to have any assurance that the most effective type of financing program possible–one tailored to fit your particular type of customer’s needs–is in place.  However, as a general rule, for equipment vendors without financial and operational expertise, good leasing company management, and available, competitive funding, the better choice is often to set up an equipment leasing program for prospective customers using outside lessors.

Whether a product vendor’s decision is to set up its own internal financing capability, or to use outside leasing companies to service their customer’s financing needs, for the financing program to work effectively, the funding must be reliable and readily available to every type of prospective vendor customer conceivable possible.  This is particularly important consideration when working with third-party leasing company.  Merely providing a prospective equipment customer with the name of an equipment leasing company to talk to is not enough.  And relying solely on the leasing company to properly put together the equipment financing has its risks.  In such as situation, a product vendor must have substantial input into, and understanding of, the credit decisions and documentation processing.

Observation: If the decision is to rely on third-party leasing companies to satisfy equipment sales financing needs, one critical point must be kept in mind:  If the success of the equipment sales effort depends heavily on customer product financing, a product vendor cannot rely on one outside funding relationship.  There have been many situations in which both bank-affiliated and non-bank leasing companies have closed their funding doors without warning and, at times, with in difference to customer commitments.

3. Establishing Overall Financing Programs Objectives

The overall objectives for an effective equipment financing program are obvious, yet time and time again they are frequently forgotten in the rush to put business on the books.  For example, everyone agrees that maintaining good customer relations is essential, yet many equipment vendors overlook the fact that once a third-party leasing company is involved that may be out of their control.  One major U.S. leasing company was well known for aggressively and effectively establishing relationships with equipment vendors.  And their customer service/administration department equally well known for aggressively, and inadvertently, damaging customer relationships through inattention and indifference.

Here are the overall guidelines to follow if you’re considering establishing an equipment financing program.  A vendor equipment financing program must:

• Preserve at all times good customer relations.
• Allow the product vendor to control its customer relationships.
• Avoid the whims of individual financing sources.
• Give the impression of financing continuity.
• Be totally reliable under all circumstances.

In order to achieve your financing objectives, you’ll want to:

• Control The Document Process. To ensure every transaction that can get done gets done, make sure you control the deal documentation, and that means:

• Be Wary of Funding Commitments.

• Avoid Providing Financial Guarantees. Be careful about providing financing guarantees for customer leases requested by third-part lessors.  It’s not unusual, for example, for a leasing company to suggest that if your company would guarantee all your customer leases, deals would always get done.  Financial guarantees can adversely a product vendor’s general growth requirement borrowing capabilities.  Worse yet, many lease guarantees permit collection from the guarantor without having first exhausted all remedies against the lessee.

• Investigate Prospective Third-Party Lessor Backgrounds Thoroughly.  The financial backgrounds, years in business, and deal track records of every third-party leasing company you consider must be investigated thoroughly.  Not doing so can create avoidable risks.  For example, many leasing companies simply don’t have the funds available to properly service a vendor’s repeated financing needs.  An investigation can prevent unfortunate surprises.

• Use Lease Brokers Cautiously. Lease brokers have no control over whether a deal will be approved or funded.  They often send financing packages out to multiple sources hoping someone will approve it.  In small transactions some brokers spend more time sending financing offerings to sources than preparing a good financing package.  Improper packaging alone can result in turndown, something that increases the difficulty of finding future funding.

• If Using Lease Brokers Watch Out For Fees. Lease brokers often charge a high fee for their services.  In large transactions they generally are worth the fee, in small transactions high fees are generally unwarranted.  When questioned about a high fee, brokers often state, that the lessor pays the fee so you should not be concerned.  The fact is a lessor needs a minimum deal profit and the fee is something it pays based upon the rent level.  The higher the fee, the less competitive the lease financing.  And brokers establish a rent level that permits the largest possible fee.

• Be Skeptical About Dealing With Lease Investment Funds. Lease investment funds promoted by investment bankers and lessors surface from time to time.  They are public or private limited investment partnerships, which raise money to invest in equipment leases.  Historically, many have had problems as a result of poor management or improper structuring.  And when problems arise funding is cut-off.  So, if you decide to work with an investment fund, do not rely on it exclusively for customer funding.

• When Working With Third-Party Lessors, Conduct Preliminary Funding Reviews. When using third-party leasing companies to provide customer financing, an equipment vendor should conduct its own preliminary “lease acceptability review” before submitting a transaction to the prospective leasing company to head off problems.  Very often issues that could result in a turndown can be addressed to facilitate an approval before the application is submitted.  Once a prospective customer is turned down by one leasing company, it is more difficult to get a funding approval from another lessor The reason may not be logical, but it is a fact of business life–credit managers at times turn down business they may otherwise accept merely because they’re afraid another credit manager spotted a problem they couldn’t find.

In summary, there is a customer financing program structure that can work for every equipment vendor, but care must be taken to guarantee that the best possible program is put together.  A vendor that works within the financial market realities has the greatest chance of arranging an attractive and reliable financing program.

Richard M. Contino, Esq. is an attorney, equipment leasing advisor, seminar instructor and a businessman experienced in the legal, business, marketing, and financial aspects of equipment financing.  He is a Managing Director of First Lease Advisors, an equipment leasing and financing consulting firm and the Managing Partner of Contino + Partners, a law firm whose practice is limited to equipment leasing and financing.  Mr. Contino is the author of six equipment financing books and two business management books, including The Complete Equipment Leasing Handbook (AMACOM Books, 2002).

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