As an asset-based lender, I often encounter a few common questions in the manufacturing sector. Below are a few of those questions related to financing and leasing—along with some answers:
Why is my bank not interested in my business?
Well it may not be quite that bad, but pretty much any business has some form of banking relationship, even if it’s just for deposits. A bank will look at your business and hang a number on it they feel comfortable with lending. The number is the total amount of credit they’re prepared to offer, and it could be a combination of loans, operating lines or other purchasing lines of credit, credit cards, and secured lending. As soon as you hit that number, your lending capacity will be capped.
It’s no secret your bank will always be your lowest cost of funds, largely because of two reasons. First, the cost of funds for a deposit-taking institution these days is less than one per cent; maybe even less than 0.5 per cent, and that’s pretty tough to beat. For a bank to put out rates a couple of points over prime, their profit margin is still very good.
Secondly, a bank will have you secured in more ways than you probably realize. I often tell customers that even though they have no debt and all their equipment was paid in cash, their bank still has a first charge against everything via a GSA (General Security Agreement).
A GSA provides to the lender a security interest in a specified asset or property that’s pledged as collateral. In the event the borrower defaults, the pledged collateral can be seized and sold. It’s presented and signed when an account is opened and gives the bank a first charge against all current and future assets.
As an asset-based lender, I often come across this when I close a deal, by taking a piece of equipment as collateral in lieu of a deposit. I inform my client I need a waiver from their bank. I almost always get this response: “but I paid for it in cash, I didn’t use my bank to finance it.” Regardless of how banks secure you or your company, they will ensure they’re always in an equity position, meaning the security is always more than the value of the credit provided and/or offered.
When it comes to small business loans, banks will first look at the size of the transaction and whether it fits the equity box of the company.
Specifically, they’ll look at the company’s total net, or essentially cash left within the company. A bank will think the transaction fits if the net worth is twice the amount of the transaction. However, in the manufacturing industry, this type of evaluation is problematic since equipment is inherently very expensive and usually purchased when an opportunity for growth comes along.
The reality is a bank has a surplus of cheap money and lots of potential investments. There’s an excess demand for their services and they can therefore pick the most secure and risk-free investments.
Why aren’t your rates identical to my bank’s?
When banks look at a potential transaction they evaluate their exit strategy. For example, let’s take a mortgage. Most institutions will not lend more than 70 to 75 per cent of the purchase price, but when they do it will be at very cheap rates—maybe three per cent or four per cent. In the event of a default, the property is sold and the bank gets all its money back because they’re in a full equity position. The amount lent is less than the total value of the asset so they’re only out the time it takes to get the property sold.
A private non-bank leasing company gets its money from a number of different places, but it’s not a deposit-taking institution and therefore has a higher cost of funds. The typical leasing company will focus on assets where they have expertise. A leasing company will look at the $100,000 transaction and expect the company to have retained earnings of $100,000. Also, a new piece of equipment will automatically depreciate the moment it’s installed. Those two factors equate to a transaction that’s riskier than a bank would accept.
Can you quote me a rate?
Getting a quote for financing is as simple as looking up lending rates on a web site. But it’s the approval that actually counts. A business will get a meaningful quote once an approval has been issued or after enough information has changed hands to evaluate the transaction and make a qualified statement.
I totally understand everyone wants to ensure they’re getting the best deal at the lowest possible cost, but shopping for financing is as important as sourcing the right equipment. The same care should be taken to find the right source of financing with expertise and an understanding of the industry.
Ken Hurwitz is senior account manager with Blue Chip Leasing Corporation, an equipment finance company in Toronto. Ken has years of experience in the machine tool industry and now works to help all types of manufacturers either source or tap into their own capital to optimize their operations. Contact Ken at (416) 614-5878 or at via email. Learn more at www.bluechipleasing.com
This article is part of the Financial Management Success Centre, showcasing strategies to access working capital, reduce costs, and leverage the value of shop floor equipment.