Business owners and managers want to compare equipment finance companies to their banks. For a good reason, a bank is a company’s first reference point when borrowing money or financing equipment or an expansion project. A bank is the most obvious place to start and a secure place to store your money and use its multiple services. But what a bank does not do well, historically because of its structure and the recent tightening of the credit market, offers business financing for capital assets (equipment). Yet many people get confused when looking for an equipment loan because they do not see the whole picture; this is where you want to compare apples to apples to get the best results. So here are a few points to compare; these are not set in stone, but based on years of experience, these trends apply most of the time.
1) Total Dollars Financed – banks normally require that you keep a balance of 20% or 30% of the equipment loan amount on deposit. This means they only finance 70% or 80% of your equipment costs because you have to keep a certain amount of YOUR money in a fixed account for the duration of the loan. In contrast, an equipment finance company will cover 100% of the equipment, including all “soft” costs, and only request a one or two-month prepayment. Again, no fixed deposits are required.
2) Soft Costs—Banks also normally do not cover “soft” costs like labor, warrantees, consulting, and installation, which means these costs come out of your pocket. An equipment finance company will cover 100% of the equipment price, including “soft” fees, nd some projects can be financed with 100% “soft” costs, which no bank would ever consider.
3) Interest Rates – this is the most popular question in the finance world: what’s my rate? If the bank requires a 30% deposit in a fixed account, then that automatically raises a 5% interest rate to a 20% rate. People will argue that you get that deposited money back at the end of the term, but that is money you do not have access to and has an opportunity cost. On the other hand, equipment finance companies target their financing rates between 3-5% for cities and 7-9% for commercial financing, which is a real fixed rate and not under-stated as the bank rates can be; thus, independent finance company rates are very competitive with “true” bank rates.
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4) Process Speed—Banks often take weeks to review and approve a finance request, while independent finance companies normally only take a few days and can work much more quickly. Finance underwriters only review business financing, while banks have other types of requests clogging their channel. Banks also have many more approval and review levels to pass, while independent finance companies normally only have two underwriting and credit committees. Even with complicated deals, the finance company’s process is always faster.
5) Guarantee – banks require, as a standard part of their documentation, a blanket lien on all assets; personal and business assets are used as a guarantee against default on loans. Therefore, your business assets, home, car, and boat can all be on the line when entering a bank transaction. This may also be the case with an equipment financing company, but if your business operation is solvent, only your business will be listed as collateral, not your assets; this is known as a “corp only” approval.
6) Monitoring – banks require yearly “re-qualifying” of all their business accounts. On the anniversary date of your loan each year, you must submit the requested financial documents to assure the bank that everything is going well and nothing has negatively affected your business. Finance companies do not require anything during the loan term or finance as long as the monthly payments are made on time. Nobody will be checking into your business or policing what you do.
When comparing your bank financing to an independent equipment finance company, you must evaluate all the key parameters, not just one. The fine print and terms of the transaction are more important than the big numbers. Banks work well within their space but have proven not to be as flexible or solution-oriented as independent finance companies focusing solely on business lending. Lester M. Salvatierra has 15 years of experience as a licensed Finance Specialist with First U.S. Finance. He helps small to mid-size companies lease or finance various equipment and special projects nationwide. Sign up now at http://www.firstusfinance.com/blog and follow his blog to get the latest valuable updates on the business financing market.
