The 3 Keys to Financial Approvals

3 Keys to Equipment Lease Approvals: CASH, CREDIT & COLLATERAL

Cash Flow – The key to receiving a lease or finance approval is positive cash flow. Most underwriters’ formulas add net income to a portion of depreciation (since depreciation is a noncash expense) and the resulting free cash flow must exceed the amount of the annual lease payments. For example, if the company has a $75,000 net income with $50,000 in depreciation, an underwriter may consider that at least $100,000 is available to repay a new lease. If the lease requires annual payments of $50,000, the lease will be approved and if it requires $120,000, the request will be denied because the cash flow is too low based upon history. Typically, the documents needed to verify cash flow are tax returns, financial statements and business bank statements.

Credit – Business credit scores for companies are recorded by Dunn & Bradstreet and Paynet. The lease transaction is guaranteed by all owners with more than a 10 percent equity position in the company. Consequently, personal credit plays a large role in lease approvals. A 700-plus credit score is required from “A” lenders, and 650-plus are required by “B” lenders. The main difference between the lenders is an “A” lender will finance a higher dollar amount at a lower interest rate. Understanding this concept is a key in determining the effect of partnerships in a business. The “weak link” will drag the group down.

Collateral – Not everyone has a 650-plus credit score, and not everyone owns a company that reports a net income. Some lenders offer leases to applicants who offer collateral in addition to the equipment being purchased. Collateral typically is in the form of stock, CDs or real estate (personal property). In the cases of real estate, lenders use a formula to reduce the stated amount of the property, and from that amount, an outstanding mortgage is reduced to determine the security amount offered. For example, if a property is appraised at $250,000, the underwriter reduces the amount by 20 percent to $200,000. If there is a $100,000 mortgage, the collateral considered on the lease is $100,000. Generally, if the property has more than one mortgage, it will not be considered as collateral for a transaction.