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 their multiple services. But what a bank does not do well, both 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 a case where you definitely 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 are only financing 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 will normally 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” costs, and 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. Now 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 associated with it. 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 a bank has other types of requests clogging their channel. Banks also have many more levels of approval and review to pass, while independent finance companies normally only have two, underwriting and credit committee. 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; both personal and business assets are used as a guarantee against default on loan. Therefore, your business assets, home, car, and a boat can all be on the line when entering into 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 and not your personal 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 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 term of the loan 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 have to make sure you are evaluating all the key parameters, not just one. Clearly, the fine print and terms of the transaction are more important than the big numbers. Banks work well within their space but have proven time and again not to be as flexible or solution-oriented as an independent finance company that solely focuses on business lending can be.
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 a wide variety of 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.