One of the more difficult type of business financing to arrange is funding for leasehold improvements.
The main reasons why this can be challenging is that the leaseholds themselves do not provide any real security value to a lender or lease financing company.
Yes, the lender or lessor has the right to seize the asset and sell it to pay off or pay down the amount they are still owed. But when leaseholds are mostly paint, interior walls, wiring, lighting, and doors, there isn’t going to be any value in trying to resell them.
In fact, the process of even trying to end up costing the financing company money as opposed to taking this action to reduce the balance owing from a default.
The most common form of financing leaseholds is through a bank or institutional small business loan program that is partially insured by the federal government.
In these cases, the risk of loss to the lender is mitigated through the partial government guarantee of repayment that can be acted on in the event of lender loss.
But another form of leasehold financing that is growing in popularity is funding via an lease financing agreement with an equipment leasing company
Like any type of lease financing, the leasing company is the actual owner of the assets being financed which in this case is the actual leasehold improvements.
Because of the lack of security being held as well as the absence of any type of government insurance program or guarantee, leasing company’s will only offer this to very strong applicants which are typically in the medical industry, but call be in other industries as well.
In most cases, leaseholds are financed via a lease along with one or more equipment items and some leasing companies will only entertain leaseholds if items of equipment are also being financed, and are making up the majority of the financing amount.
But that’s not always the case either. Its possible to lease financing for leasehold improvements from an equipment leasing company where the only assets being leased are the leaseholds themselves.
And compared to the bank route for getting leased financed, the lease company approach is significantly faster to apply for, get approved, and funded.
All in all, if you are a business professional that can qualify for this type of leasehold financing, it may be something you want to consider, especially if you are working on a short timeline between where you are today and when the improvements need to be completed.
If you’d like to know more about financing leaseholds through a loan or lease, I recommend that you give us a call and we’ll go through your situation together and discuss the different financing options that may be available to you.
Other than getting financing in place, the primary goal of any business owner or manager trying to arrange funding for equipment acquisition is to get the best deal possible meaning securing the best rates and terms available in the market to them.
To expand on this further, the best rates basically refer to the lowest cost of capital you will be charged on any financing you secure.
But understanding what the best rates available to a particular business at a particular point in time is not always easy to determine.
Let me explain.
First of all, the best overall rate in the market place is not going to be available to all borrowers.
Second, the best rate can change on a day to day basis, based on financial market conditions that influence the cost of funds for a lender or leasing company.
Third, the best overall rate of any sort, by definition is the lowest risk rate, so the application assessment must fall into the lender or leasing company’s definition of lowest risk possible for their program.
Fourth, not all sources of financing provide the lowest possible market rate and instead provide the best available rate within their own programs being offered.
Its not hard to get a headache with this type of stuff.
But here are some general guidelines to follow when seeking the best available rates and terms for your business.
First of all, remember that financing rates are always based on a number of different factors. So how your particular business and financing application score out on these different factors will dictate the type of financing rate you are offered.
One of the key factors that influences financing rate is deal size.
Generally the larger the deal size, the lower the potential rate and vise versa.
So if you have great credit and are a well established, financially sound business, you still may not get as good a rate on a $25,000 equipment lease as you would a lease or loan for $250,000 or greater.
Another factor that greatly influences the rate and is also impacted by deal size is the credit profile of the applicant business.
Stronger credit also contributes to lower rates being offered.
Other considerations like type of asset, condition and age of the asset, location of the business, and industry that the business operates in can all contribute to the best available rates that can be provided to you.
So when were talking about the best rates we need to make a distinction between the best available rates in the marker place and the best available rates available a certain credit request and application process.
There can be a considerable difference between the two which needs to be well understood when shopping for equipment financing so that time is not wasted pursuing something that you may not be eligible for or is not available to you at a given point in time.
If you’re a business owner or manager looking to secure financing for either new or used equipment, you’ll be happy to learn that there are a large number of potential sources of financing available to you.
In this article I’m going to provide an overview of the market place for equipment financing and how the different financing sources are categorized.
First of all, there are two basic forms of financing for business assets that fall into the equipment category.
You can either finance via loan or lease.
Loans are typically provided by banks and other institutional lenders that have a broader business financing focus which includes funding applications for equipment.
Loan by their very nature tend to relate to the lowest levels of risk or “A” credit deals. Higher risk financing scenarios do not typically qualify for an equipment loan.
The second form or financing is provided in the form of an equipment lease.
Equipment leases are offered by both stand alone leasing companies and institutional lenders.
For instance, a bank that provides equipment loans may also have an equipment leasing division.
Going one step further, the very same bank can have a leasing group for equipment under $150,000, one for amounts over $250,000, and still another group for asset based lending, which is basically higher ratio lending against a combination of assets including equipment.
Stand alone leasing companies can be categorized in a number of different ways.
Let’s discuss each in no particular order of importance.
Leasing companies will have a focus according to the size of the deal. The largest number of equipment leasing companies are in what we call the small ticket credit space which is represented by deals under $250,000 in size. There are also leasing companies that focus on larger deals only as well.
Another way leasing sources are categorizes is by the type of credit.
Most will focus on one slice of the credit profile and combine that with a certain maximum deal size.
Additional considerations to a lease company’s financing profile include the type of asset, the industry, and the area of the country where the business is located.
So on one hand there are a lot of different sources of equipment financing.
On the other hand, it can be a bit of a jungle to figure out who can help you AND who can provide you with the best deal.
Another layer of complexity is that not all leasing companies work directly with the public and instead source their deals through broker networks.
So depending on your deal requirements and your financing and credit profile, you may not have direct access to the best lending or leasing sources unless you work with an equipment financing broker.
If you’d like to know more about the financing sources that would be the most relevant for your unique requirements and profile, I suggest that you give us a call and we’ll go through your situation together and provide you with feedback right away.
When you’re looking to finance new or used equipment for your business, the rates and terms you are going to be able to secure are going to directly relate to your credit rating to large degree.
For small and medium sized businesses, both corporate and personal credit can be considered by a lender or leasing company that is processing an application for financing.
When a business has been around for more than five years and has well established corporate credit, then no personal credit will be considered. But until corporate or business credit has been established to the level required by a financing source, both personal and business or commercial credit will be considered in any lending and funding decision.
Depending on who you are talking to, there are basically 4 different levels of credit.
The first level of credit I will refer to as A+ credit.
This is the lowest level of risk for a lending or funding source and typically is provided by banks and other financial institutions, and only on amounts of $250,000 or higher. There are always exceptions to the rule, but this is a basic guideline that can be followed over 80% of the time.
The second level of credit is A credit which is slightly more risky or costly to administer than A+ credit.
From a credit profile and scoring point of view, there may be no real difference between an application considered to be A+ and one considered to have A credit. The main difference in a lot of cases is the size of the transaction and the size of the company seeking financing.
Once again, A+ credit is the lowest risk form of financing, so by default A credit is slightly more risky or costly and tends to relate to transactions under $250,000 with the average for this category closer to $100,000.
The third category is “B” Credit.
With a B Credit rating, the available credit for the business and/or individual has been bruised to some degree from late payments, high credit utilization, excessive inquiries, judgements, collections, or some combination of these items.
The lender will still view this type of applicant has having strong cash flow and also having their credit repair or improvement process under control. But because of past issues, there is a higher risk of loss, so a higher rate is charged to this type of profile.
The last category is what I will refer to as “C” credit.
For applicants that fall into this category, their credit profile is going to show a number of issues and the credit score could be well below 600 on the personal side.
This is the highest risk that available lenders will take on with financing typically provided by lending or leasing sources that are very well connected with the down line liquidation process of the asset so in the event of a default in repayment, the financing source can quickly and efficiently liquidate the asset to clear off the amount outstanding.
The cost of financing will be considerably higher than “B” credit in most cases, with terms limited to two to three years in most cases.
Many view “C” credit as a last resort form of financing and typically can only be utilized for a short period of time due to challenges associated with paying off both a high cost of financing and a short repayment term. This last credit category is common with equipment refinancing scenarios on owned or used equipment.
With any application, the go is to try and qualify for the highest level of credit possible so as to secure the best potential rates and repayment terms.
If you’d like to know more about the different levels of credit, please give us a call and we’ll get all your questions answered right away.