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.