Your business needs equipment financing, and you’ve decided the benefits of equipment leasing apply to your business. The next step is to apply for an equipment lease. How can you get approved for an equipment lease?
In this post, we’ll explore what lenders are looking for and what you need to get approved. Then we’ll leave you with a few quick tips to help you in your lease application process.
Why don’t some businesses get approved for an equipment lease?
Some businesses don’t get approved for an equipment lease because they can’t provide assurance to lenders that they can pay off the lease.
Lenders know there’s always some risk involved in what they do. There’s always a risk the money they’ve credited won’t be paid back. Some lenders have more risk tolerance than others, but they all want to reduce risk with each lending agreement.
It’s helpful to understand what’s involved for a lender if someone defaults on an equipment lease agreement. If the lender must repossess the equipment, they must:
- Detach and disassemble the equipment
- Ship the equipment to someone who will sell it (an auction house or equipment vendor)
- Pay for any necessary repairs or refurbishing that’s required for resale
- Pay commission to the equipment reseller
- Pay legal fees
- Pay bailiff fees
- Pay staff for all the time and work involved in this entire process
Depreciation is also a factor contributing to the risk. Equipment is a depreciating asset. Just as with a car, as soon as you “drive it off the lot”, it’s depreciating. So, a lender could not sell repossessed equipment for the full amount they invested in it. They won’t “break even”.
See The Reality of Equipment as Security for more information about this.
Understandably, a lender wants to avoid this scenario. That’s why they have certain requirements to approve an equipment lease.
What do I need to get approved for an equipment lease?
A lender requires certain information to help them determine the level of risk involved in providing you with an equipment lease. Here’s what lenders look for before giving an approval.
Business Track Record
For equipment over $50,000, a lender typically wants to see two years’ worth of business financials. However, it’s absolutely possible for startup businesses to get a lease approval too. For new businesses, lenders typically need to see personal financial statements and tax documentation. A business plan is a tremendous advantage for new businesses seeking equipment lease financing.
A lender wants to understand why your business needs the equipment. What is the purpose of the equipment? How will it benefit your business? You need to make the case that the equipment is a good investment.
The equipment itself matters, especially for new businesses. If the cost of the equipment is low, but the resale value is relatively high, there’s less risk involved for the lender. The potential for reselling the equipment impacts the lender’s evaluation as well. A highly customized machine that’s only used in a niche industry is a higher risk than equipment with broader appeal.
Your Credit Report
Your credit report is an unbiased picture of your credit history—how you’ve handled money in the past. It answers questions lenders ask when they want to determine risk, such as
- Do you pay your bills on time?
- Have you ever bounced payments?
- Have you had any bankruptcies?
- How long have you had any existing credit?
- Have you maxed out any existing credit?
Essentially, your credit report shows lenders how well you manage other people’s money.
Your credit report is created the first time you borrow money, apply for credit, open a bank account, or sign up for a utility. Banks, finance companies, credit unions, and some retailers regularly send information about your financial transactions to the credit reporting agencies. If you default on a loan, miss payments, make late payments, or apply for a new credit card or loan, it’ll show up on your credit report.
A new business doesn’t have much credit history, but you can build a healthy credit history. Get a small credit card or loan and be sure to make your payments on time. The same is true for your utility and phone bills. A smaller equipment lease is another way to start building credit history for your company.
Your Credit Score
Your credit score is a judgment about your financial health at a specific point in time. It shows lenders the risk you represent compared with other consumers. In the same way a school report card shows your final mark based on all your tests and assignments, your credit score is determined by the history of your money management.
There are many ways to work out credit scores, and some lenders have their own method. But Equifax and TransUnion, Canada’s primary credit-reporting agencies, use a scale from 300 to 900. High scores are low risk for lenders, and low scores are high risk for lenders.
For more information about credit, credit reports, and credit scores, including what to do if you have bad credit, see Your Credit Report & Credit Score in Canada: 10 Important Things You Need to Know.
A Co-Signer (Maybe)
A co-signer is not required for every equipment lease. When a lender needs additional security and an extra layer of protection to reduce their risk, they might require a co-signer to promise to pay off the debt if the primary borrower cannot pay (for whatever reason).
Common scenarios that might require a co-signer include when the company or borrower:
- Doesn’t have a strong credit rating
- Doesn’t have a lot of industry or business experience
- Isn’t making a lot of money
- Is a startup company
If the above is true of a business, the lender will usually ask for the owner to co-sign the lease. It is the owner’s promise that they’re standing behind their company.
Learn more about co-signing at What You Need to Know About Co-Signing.
3 Tips for to Help You Get an Equipment Lease Approval
Knowing what lenders look for when approving an equipment lease should help you in getting equipment financing. Here are 3 more tips that will help you get an approval.
1. Details matter
Lack of information is one of the most common reasons lease applications are declined. Be as detailed as possible when filling out your application and providing other information to lenders. The more details the lender has to look at, the clearer they can see the big picture.
For example, when you state your industry, don’t just say “Graphic Arts”. Specify what type of graphic art you do—Vehicle wraps? Neon signs? Print signage?
Lenders like to know the 5 ‘Ws’:
- What do you do?
- Who do you do it for?
- Where do you do business?
- When do customers need your product or service?
- Why do you need the equipment?
2. Make sure the information is accurate
When filling out a credit application or submitting financial documents, be careful to review the information for accuracy. In most cases, lenders verify the information you provide. If any of the information is inaccurate, it might be deemed fraudulent.
For example, don’t give ballpark figures for the value of your home or the balance on your mortgage or credit cards. Be specific and accurate.
3. Have an accountant prepare your financial statements
It’s not absolutely necessary, but having an accountant prepare your financial statements presents your information with an added measure of validity. It’s a “plus” from the perspective of a lender.
Looking for an Equipment Lease Approval?
Are you ready to apply for an equipment lease? Our lease coordinators can help you gather all the necessary documentation and information. We help to prepare a credit package for the lenders. We work with a broad range of lenders, and we can present your case to the lender(s) we know would be most interested in financing your equipment purchase. Contact one of our lease coordinators to get started!