Equipment Leasing 101

Preparing for an Equipment Lease

Each year several businesses in the United States lease equipment for their operation. Leasing could be frustrating to those who do not understand the process. Knowing what a lender requires can help business owners get better prepared.

Personal Credit: Your personal credit is reviewed to determine your risk for financing. Most lenders have niches that they cater to. While some would work with individuals with less than perfect credit scores, it is advised that you clean up anything derogatory on your credit profile to get you qualified for a premium-leasing program or rate. A FICO score is only a starting point. A high fico score isn't a guarantee that you will qualify for a lease, not to mention a premium rate. In reviewing a credit profile, underwriters also look at the depth of the entire credit profile and not the score by itself. 

While not always the case, a solid profile would be someone who has established credit for at least 36 months or longer and has paid her bills on time. For those who have experienced periods of slower or derogatory credit such as a recent bankruptcy or foreclosure, it is typically recommended that credit is re-established for a decent period of time following such slow periods. The best way to know what is on your credit report is to order one. There are programs that allow a consumer a free credit report once a year. There are also paid programs online, where consumers can order their credit reports. It is recommended that a consumer review his credit profile from all 3 major credit bureaus - Equifax, Experian and TransUnion.

Another important factor often ignored is the evidence of comparable installment debt. Most lenders would want to see that you have at some point in the past taken on an installment debt comparable to what you are seeking, and that you have paid in a satisfactory manner. 
Business Credit: This is a another important part of business financing. Although much emphasis isn't placed on personal credit, there is more scrutiny on business credit when financial programs like merchant cash advance are sought. There are several business owners that are unaware of their business credit score and how it ties into equipment leasing. A starting point for lenders is the Dun & Bradstreet report. Every business owner must be familiar with this report to see what is listed in it. This report is a snapshot of a business. It provides records of how a business pays its vendors and creditors. It analyzes your risk as compared to others within your industry. It is smart to understand what is present in this report prior to applying for equipment financing. 

Another thing worthy of mentioning is the UCC filing. The term UCC is short for Uniform Commercial Code. This filing is a lien placed upon a business or the assets of a business and registered with the state in which it is located. A detailed D&B report usually shows if there are any liens and judgments against the business.

Reserves: A lender likes to see that a prospective lessee carries a reasonable amount of reserves, which is usually verified by bank statements. Carrying a decent bank balance consistently tells a lender that your cash flow for your business is in order. Avoid any non-sufficient funds (NSF) in your business bank account.

The most important reason for the checks and verification is to protect the lender. Put yourself in a lender’s position, you wouldn’t want to lend money to a friend or relative that you know has a habit of not paying back on time or at all, let alone a stranger. Lenders have to be extremely cautious about whom they make financing available to if they plan on staying in business. If we see things that way when approaching equipment leasing, it will make things a lot easier to get prepared and ultimately avoid any hiccups in qualifying for the best programs offered.