Owners of a pallet manufacturing or recycling operation today are finding it very challenging to secure installment loans from their commercial banks. Even though interest rates are at historical lows, this does not necessarily make it easier to get approved for a loan for your business.
There are a couple of factors making it difficult to get a loan from your own bank to buy a pallet nailing machine or saw.
For starters, banks have to deal with a variety of government regulations and reporting requirements. Recently, I spoke with the president of a small commercial bank that spent more time with the federal regulators than his own clients. Also, interest rates are so low that there is little room for banks to make a decent profit margin. Your banker has to choose carefully or risk losing his job. He understands how to underwrite and remarket commercial real estate to his own clients.
Banks don’t need to write loans to make money. If you are dealing with a large bank they are making significant profits from fees and trading of securities. Even smaller community banks have fee income that can be earned without taking any risk.
Equipment is less attractive to banks than real estate. Banks prefer lending on assets, such as real estate that appreciates in value. They can easily remarket a commercial property to their own local business clients and prospects. The pallet and sawmill industries are a sector that most lenders don’t understand. Trying to resell a pallet nailing machine or saw would be very difficult and expensive. If he gives you an installment loan, they likely will secure by putting a lien on your building and business assets and receivables.
Perhaps as a business owner you should consider approaching an equipment leasing company that has a long history financing pallet and sawmill equipment. It can save you valuable time and probably get you better terms if you also work with a leasing company experienced in the pallet/sawmill industry.
As the owner of the business you still need to make sure your business and personal credit is excellent in order to get the best terms.
If you are a closely held company, your top priority is to make sure you have excellent personal credit. You can now check out your credit report for free with all three reporting agencies once per year. Your first priority is to check out your credit report from all three reporting agencies. The three major agencies are listed in the sidebar on page 54.
Your goal is to have a Fair Issac Corp. (FICO) credit score no lower than 700. Your business credit score is calculated with the following weighting
1. Payment history 35% – pay your bills on time and immediately after receiving
2. Time in bureau 15% – if you don’t have any credit, start with a simple credit card or bank line of credit.
3. Types of credit 10% – installment loans build your credit , while too much revolving debt lowers your score.
4. New credit 10% – be careful not to take on too much debt at the same time
5. Debt to credit ratio – keep your revolving availability at 70% or better and don’t carry over debt. Avoid paying with credit cards just to get free plane trips or cash back bonuses.
In terms of your business credit you actually can take some simple steps to dramatically improve your business credit score with Dun & Bradstreet (D&B). I speak with business owners who seem to think that D&B is their enemy and refuse to provide them with any information. Like holding a grudge with a family member, the only one who feels the pain is you in terms of paying higher rates on all your business financing.
Lenders understand that D&B can be misleading, but if you have a good PAYDEX® Score, you can get a same day approval with much better terms saving you money and time. The PAYDEX® Score is D&B’s unique dollar-weighted numerical indicator of how a firm paid its bills over the past year, based on trade experiences reported to D&B by various vendors. The D&B PAYDEX Score ranges from 1 to 100, with higher scores indicating better payment performance. With a score of 65 and above, you can get a same day approval with much better terms.
Paynet is also a popular tool used by banks and leasing companies to predict future payment practices. Lenders anonymously report payment history to each other. If you have had a prior bank loan with a large financial institution, there is a good chance that good pay history will help you get good terms.
When trying to verify credit history to a potential lender, I would suggest providing any installment loans or equipment leases rather than a trade supplier reference. Comparable credit can often be the difference between an approval and a decline with the best term lender.
Keep in mind that lease payments vary dramatically between lease companies. I would not recommend shopping your credit application, but I would definitely consider getting a second lease quote if you sense your vendor has a hands-off approach with its leasing company. You might also be concerned if the supplier is unwilling to let you talk with the leasing company backing the purchase.
Knowing what to ask and look out for can make a huge difference. Consider these questions for your leasing company.
• Have you financed equipment in our industry? Please provide me with five client and vendor testimonials.
• How long do I need to own the business to qualify?
• What is the minimum credit score needed for approval?
This should give the leasing company enough information to quote your monthly payments. You will need to obtain the following information to make a fair side by side comparison:
• Equipment Cost (pre-tax)
• Monthly lease payment
• Lease Rate Factor – This is determined by dividing payment/equipment cost. Ask the leasing company to provide and check to see that your figure matches with its assessment.
• Number of Advance Payments
• End of Lease Purchase Option – $ 1 buyout is most common today.
• Early payoff penalty or discount – typically better term lenders offer discounts after 12 monthly payments.
• Automatic Renewal/Evergreen Clauses – only typically apply on fair market value or 10% buyouts.
By taking the above steps, you should be able to secure better lending terms. For example, a company buying a $75,000 piece of equipment could expect the following terms:
• One payment in advance
• $1,500 per month (.020 rate factor or better)
• $1 buyout at the end
You can secure an equipment loan in some cases approved without a personal guarantee. Any Section 179 tax write-off benefits apply while you still have the cash to invest in your business or perhaps a building.
Ian Liddell has worked with pallet/sawmill owners since 1993. He has owned and managed Accord Leasing since 2001. He can be reached at 513/605-1059 or 513/293-4480 or email ian.liddell@gmail.com.
Three Major Credit Bureaus – Secure Your Annual Free Credit Reports
Equifax: 800/685-1111 or visit www.equifax.com
Experian: 888/397-3742 or visit www.experian.com
TransUnion: 800/888-4213 or visit www.transunion.com
