Here are some tips to know
when
considering financing
Here are some tips to know when considering financing
Tip #1
Welcome to the Commercial Financing Market, it’s a completely different world than the consumer market where financing a car or home is easy peasy. The Commercial Equipment Financing Industry has its own set of risk scores which have absolutely nothing to do with or even align with the consumer market. If you are a person who has a 700 score, in that case, you could walk into Mercedes, get a really low rate, and drive away that same day. That’s not the case with Commercial Equipment Financing because Commercial Equipment is used as an asset to produce revenue for a business.
Tip #2
The specific industry you are in matters. Meaning, are you in trucking? If so, do you run long haul or short haul? Do you run dump trucks? Do you have pump trucks for your waste removal business, or do you run box trucks? Are you in the tree trimming industry and need a boom truck? The collateral matters to the underwriter. Even the collateral has different factors when determining the terms an underwriter will approve you for. Every industry is assigned a risk score. The lower the risk score, the better the interest rate and credit terms. Conversely, the higher the risk, the higher the rate, and you might have to put money down depending on your credit.
Tip #3
I bet you already know this question: What is your personal credit score? Whether you are a brand-new or newer business, or even an established one, personal credit score plays a big role in the underwriter’s decision. The higher your credit score, the better the terms and financing contracts available. Usually, if your personal credit score is under 650, you can expect a down payment to be required, especially if you are in the trucking industry. However, if you are in construction or another industry, getting a $0 down approval is very possible, particularly with a 630+ credit score. The reason is that lenders like the equipment and the industry, which typically have a lower risk of default. This means they are willing to issue a better credit approval to someone with okay credit.
Tip #4
Comparable borrowing history, or "Comp Credit" as we refer to it in the industry, is also taken into consideration. This is just a fancy way of saying: have you financed any commercial equipment in the past?
Tip #5
How long have you been in business? Are you a start-up, a few years in, or have you been around forever? This matters in the eyes of the underwriter. A start-up company will always have to come up with a down payment, the amount of which depends on your credit score and credit history.
Avoid Scams
It is extremely unfortunate that some financing companies engage in questionable practices. There are thousands of financing companies out there that represent themselves as the “Lender.” You might have heard the term “Direct Lender” before? Well, this term is used very loosely and the roeason why I say that is when most people hear the word “Direct Lender” they assume the finance company they are speaking to is the actual lender that is lending their own money or putting a lien on the collateral.
That is definitely not true!
The truth is, there are hundreds of financing companies out there and only so many actual lenders (lienholders) that lend their own money and place a lien on the equipment when it’s financed. It’s similar to the mortgage industry, where there are 100’s of mortgage brokers out there, however, there are only so many banks that hold the note.
In a nutshell, all the finance companies go to the same banks (lienholders) to get customers’ credit approved.
This is a great moment to share with you one of the biggest scams in the book! I call it “The Send Me Your Money” scam. The red flag on this scam is once you have verbally agreed to the credit terms or a phony credit approval (that’s another scam), they will ask you to send them money before ordering your closing documents.
Here are some of the more obvious lines they use:
WHY FINANCE ?
Here are some tips to know when considering financing
It’s a completely different world than the consumer market where financing a car or home is easy peasy. The Commercial Equipment Financing Industry has its own set of risk scores which have absolutely nothing to do with or even align with the consumer market.
If you are a person with a 700 score, you could walk into Mercedes, get a really low rate, and drive away that same day. That’s not the case with Commercial Equipment Financing because Commercial Equipment is used as an asset to produce revenue for a business.
Meaning, are you in trucking? If so, do you run long haul or short haul? Do you run Dump trucks? Do you have Pump trucks for your waste removal business or do you run Box Trucks? Are you in the Tree Trimming Industry and need a boom truck?
The collateral matters to the underwriter. Even the collateral has different factors that come into play with the terms an underwriter will approve you for.
Every Industry is assigned a risk score: the lower the risk score, the better the interest rate and better credit terms. The higher the risk, the higher the rate and you might have to put money down depending on your credit.
Are you a startup, a few years into business, or have you been around forever? This matters in the eyes of the underwriter. A startup company will always have to come up with a down payment; how much depends on your credit score and credit history.
As we refer to it in the industry, this is also taken into consideration. This is just a fancy term for saying: have you financed any Commercial-related equipment before?
If you are a brand new or newer business, or even an established business, personal credit score plays a big role in the underwriter’s decision.
The higher your credit score, the better terms and the better financing contracts that are available. Usually, if your personal credit score is under 650, you can expect a down payment to be needed, especially if you are in the Trucking Industry.
However, if you are in construction or another industry, getting $0 down approval is very possible, especially with a 630+ credit score. The reason being is that lenders like the equipment, and the industry has a lower risk of default, which means they are willing to issue better credit approval to someone with okay credit.
QUESTIONS TO ASK
Asking questions is always important,,, getting direct answers to those questions is evenmore important. Unless you have been around the block when it comes to financing equipment.it’s difficult to know which questions to ask especially if you never financed equipment before.
Here is a list of good questions ask?
Please send me my terms in writing,, well that’s not a question more of statement-lol!
What are the fees associated with this transaction?
Make sure they break down the total amount for you. With any commercial equipment financing transaction a customer will be charged fees. There are different types of fees that are charged. One thing to note, the amount of fees charged upfront has nothing to do with the interest rate associated with the transaction. Believe it or not, some financing companies try to pass off a $2500 doc fee as a way to “buy down” the interest rate,,,,A $2500 fee for one piece of equipment is ridiculously absurd and that financing company is definitely “padding” the lien holder’s fee to make more profit.
- Admin fee or Doc fee
- UCC filing fee (if not a titled unit)
- Title Agency fee (if its title equipment and the vendor is doing the title work)
- GPS Unit fee (some lenders require a GPS unit to be installed in title equipment, some lenders charge the customer for this, some don’t)
- Wire fee (some charge for this) Prefunding fee (some will charge, some will not)
What type of contract am I signing?
Can I get a copy of the contract to read over?
Is there a pre-payment penalty?
Can I payoff early and receive a discount?
TYPES OF CONTRACTS
There are many different types of contracts available in the Commerical Equipment Financing
which many newer business owners do not have much knowledge of simply because less honest finance companies don’t really want you to know to the ins and outs. Most of them want you to think you’re signing a Principle and Interest type loans. To confuse matters even more, every lienholder has their own contract and their own set of rules as I like to call it.
Here is the list of the most common contracts you will find:
Why the FMV Clause Matters in Leasing Contracts
The Red Flag: FMV Determined by Lessor
If in the contract it states the “FMV” is determined by Lessor (the financing company), it is a clear sign that you are working with a scam finance company who is dishonest and wants to milk you for every dime you have.
The wording in this contract allows them to charge you whatever they determine the FMV to be. Do you smell the liability hanging off of that one????
Protect Yourself with Proper FMV Language
Here’s a little leasing 101 for you to keep in back pocket:
If you have to entered into an FMV lease, make sure that the language written in the agreement states the FMV is determined by an unrelated third party appraisal company who is selected and agreed upon both the lessee (you) and the lessor (them) to determine the FMV.
This language is the only way to limit your liability at the end of lease term if you to choose to purchase the equipment. If the leasing company refuses to put this language into the lease agreement, then run quickly in the other direction.
Stop taking their phone calls and look for another finance company to work. You’ll end up thanking me and saving yourself thousands and thousands of dollars.
The Evergreen Clause: A Hidden Trap in Leases
What is the Evergreen Clause?
Another aspect of some purchase option and FMV leases is you need to look out for the term “renewal period” when reading over the contract.
Some people in the industry label this as the “ever green clause” because, in my opinion, you are forever paying your hard-earned green money to the lender.
How It Works
Essentially, how it works is somewhere in the contract there will be a clause in which you have to give the lender advanced notice (aka notice period) if you chose to return the equipment back to them or exercise your right to purchase it at the end of lease term.
Here’s where the GOTCHA comes in:
- The contract will state if you have to give a 30, 60, or 90 day written notice.
- If you miss the “notice period” and fail to give notice, your contract will automatically extend for a set period of time, which is usually anywhere from 3–6 months (the “renewal period”).
- During the second renewal period, you must give the lender again advance notice to exercise your intention—give back or buy.
The Endless Cycle
If you miss this time period to give notice on the second renewal period, the lease will renew again for the third time! It sounds illegal, but it’s not. By the time you finally get out of this lease, you end up paying for the piece of equipment at 3 to 4 times over the initial purchase price.
Fortunately, not all leases have this clause in them, which is why it’s very important to ask questions and read the lease contract over carefully.