Lahti says a robust economy and a plentiful supply of debt capital have generally made loans easier to get. But what's really put the supply of loan funds over the top is the use of credit-scoring models.
Credit-scoring represents a paradigm shift in business lending. With traditional credit analysis, businesses are analyzed for their debt-paying ability--a time-consuming and expensive process. In fact, the same credit analysis that's used for a $2 million loan is applied to a $200,000 loan--making the small-business loan application process slow and difficult.
But under the credit-scoring model, businesses are analyzed not so much on their ability to repay a loan but on the probability that they'll repay it. In fact, says Lahti, for leases of less than $100,000, a leasing company may simply credit-score the business owners' personal credit and check trade and bank references to reach a decision.
As a general rule, for leases of more than $100,000 but less than $150,000, a leasing company will credit-score a business and its owners and ask for a full set of financial statements. When leases surpass $150,000, would-be lessors face the same kind of scrutiny and analysis they'd face with almost any commercial lender.
So what are the red flags in a credit score that might cause your lease application to be turned down?
- Personal credit problems. Past delinquencies, slow payments or nonpayments will reduce your overall credit score.
- A high number of credit inquiries. If a lot of lending institutions are scoring your credit, it could be a sign you've made too many credit applications and are carrying too much debt.
- Lengthy payments on trade credit. If you stretch out payments to your vendors to 90 days, your payment history will negatively affect your chances of loan approval.
- A high number of NSF bank notices. If you continually write checks that are returned for insufficient funds, it will undermine your credit score.
- Lawsuits and judgments. These are never good signs for a lender.
- Frequent changes in banking institutions. Lahti says most lenders like to see at least two years of history with the same institution.
If your credit score comes up low, most leasing companies will take steps to make the deal doable. "In the trade, we call this structuring," Lahti says.
Popular structuring strategies include down payments on equipment; additional guarantors; and putting up additional collateral in the form of real estate, publicly traded stock, letters of credit and equipment a company already has. "If you already have equipment on your floor, that's equity," says Lahti. "You can use it as additional collateral. In fact, if you need working capital, we can buy your equipment and lease it back to you."