7 Tricks of the Financing Trade

Corey Bell

In this battle, money is the weapon of choice: Either arm yourself or be defeated.

For example, you know that automated collection is one of today's more effective swords to slash disability claims and increase productivity and efficiency. But when do you have the time to gather the information necessary to obtain financing?

Your days are already filled with managing employees, dealing with customers, driving a truck and putting out fires. If you manage to finish all of this before the sun rises tomorrow, you might stop for some food and a quick nap.

When it comes to financing, you need something fast, simple and easy. Unfortunately, for many, financing becomes an afterthought, something done quickly after you've spent much time investigating the equipment options and identifying the vendors that will provide the equipment, price and service you want.

Just remember this: A little preparation will go a long way in "greasing" the credit process.

Following are seven of the most common mistakes business owners make when they apply for credit.

Not being in business long enough, in a specific location, for the dollar amount requested. The lender wants to know the amount of time in business under the current ownership in the present area - not how long the previous owners were in business or if you were successful running a company in another state. The amount of money requested makes a big difference, too. For example, a lender might be comfortable loaning $50,000 to a 2-year-old business but would be hesitant to give it $150,000.

*There are many ways to prove additional experience in business. Were you the manager of a similar operation elsewhere? Were you a minority partner who bought out the other partners? Did you work in the family business for years but recently take over? Did you sell a similar business and start a new one? Key point: If you were a manager of another company, did you have check signing authority?

*If you need more money than your time in business will warrant to a single lender, consider working with a broker. Brokers can spread the transaction among several lenders (all of whom are informed of the process) allowing the risk to be spread as well.

*If you can document how acquiring this equipment will not adversely affect your monthly cash flow but will replace other expenses, the lender is more likely to approve the transaction. For example, when you apply for the lease, let your lender know that you currently are spending $1,500 a month renting a truck, while the lease payment on a new truck is $1,100 per month. Supply copies of invoices to justify a larger lease.

Owner's personal credit history is incomplete or not current. For most closely held businesses, corporations, proprietorships or partnerships, the owner's personal credit is a key factor in deciding whether or not to extend credit.

*Before you apply for credit, get a copy of your credit report from each of the three major reporting agencies: Equifax (800) 685-1111, Experian (formerly TRW) (800) 422-4879 and Trans Union (800) 888-4213. Correct any errors in the report before you apply. It also may be possible to remove negative items even if they are correct.

*If a lien or judgment has been filed against you, it is public record and will appear on your credit report. You must notify the reporting agencies in writing if you have satisfied the lien or judgment so that the item will be noted as being satisfied.

*When you apply for a loan, tell your lender if you have ever had a debt placed for collection. If it was paid, be prepared to show proof. If it was not paid, you must explain why.

*Clear up outstanding tax liens or defaulted student loans before you try to get financing.

Not carrying adequate bank balances. What is considered an adequate bank balance versus the lease varies widely among lenders. They all agree, however, on a specified minimum cash flow through the business checking account to support the additional debt.

Thus, you must have a business checking account no matter how small your business.

*If your business is a proprietorship, it may be possible to combine your business and personal checking accounts to show a greater average daily balance.

*Your business bank account is one of the best ways to establish time in business. As soon as you have a company name, open your account. Your doors may not be open, but your business is.

*If you have more than one business account, list them all, including business money market or savings accounts.

"Shotgunning" your credit request. Many business owners, not understanding the credit industry, will complete and submit several credit applications.

The first thing each lender does is pull a credit report on the business' principals. These multiple "hits" on the owner's credit reports can be the kiss of death to a marginal applicant and can adversely affect even the best credit risk.

The lenders don't know if you are trying to get $150,000 - $50,000 from three sources - or if the other companies have turned you down. Either scenario is not good and will require extensive explanations.

It's fine to get several quotes as long as you only complete and submit one credit application. If you use a leasing broker, it has the ability to shop the credit markets on your behalf without tracking up your credit.

Not submitting accurate data. In today's information society, applicants and financing sources seldom meet face-to-face. Sloppy or omitted information can wreak havoc and cause delays with a credit request. "Robert Bell," "Bob Bell" and Robert Bell Jr. are not necessarily the same person. Additionally, "Bell's Sanitation Inc." is not the same as "Bell's Garbage."

Most requests for financing less than $75,000 only require a credit application. Take an extra five minutes and fill it out completely and accurately. Here are a few hints: 1. The exact corporate name and/or dba (doing business as) name: ILA Investments Inc. dba Independent Leasing Associates.

2. Time in business under current ownership. Eighteen months is not two years.

3. Exact street address - not "P.O. Box 105."

4. All business references with correct account numbers and/or contact names.

5. Exact legal name of all owners, home addresses, Social Security numbers and percent of ownership.

6. Detailed equipment list.

7. Vendor's name, address and phone number, plus a contact name.

8. Describe the equipment as "new" or "used."

9. Corporate structure: corporation, partnership or proprietorship.

10. Prior banks, if any.

Trying to hide "stuff." Everybody has flaws. It may be a bill that was disputed or a tax lien filed or a problem during a divorce. Nine times out of 10, the lender will discover the problem. The best bet is to address it up front, come clean and tell all.

Find an individual at a funding source with whom you are comfortable. Your vendor may have someone with whom they have worked and can help you. Explain the problem, how you resolved it or why it wasn't resolved. Don't be embarrassed. Lenders have heard every "the-dog-ate-my-homework" story you can imagine. The financing business is here to approve transactions, not turn them down.

Having the wrong kind of debt. Every trip to the mailbox yields another great offer for a cheap rate credit card. Because credit cards are so easy to get, many small business owners have used them to finance equipment purchases. In the equipment finance industry, several types of debt exist - some good and some bad.

Mortgage debt, no matter how large, is fine as long as you are paying it on time. Installment debt (cars, loans, leases) is fine, too. However, revolving debt (credit card, department store and gas cards) is a horse of a different color. This refers not only to how much you owe (when the total goes above $25,000, lenders get nervous), but also how much more credit is available. It may seem crazy, but you are better off with $10,000 of credit card debt and $10,000 still available than with the same amount of debt with only a few thousand more available. Many leases are rejected because of excessive credit card debt or maxed-out cards.

Reduce your revolving debt as quickly as possible or try to convert it into a bank loan.

In spite of the pitfalls previously cited, when you are prepared, financing can be almost as simple as ordering two cheeseburgers and an order of fries.