Personal Guarantees – Financial Presentation – Health of the Industry
How to Get Your Equipment Lease APPROVED – As a large and well connected Equipment Leasing company we love to finance expansion opportunities for small to medium sized business. There is nothing better than to see a small company expand and grow organically and needing capital to obtain the needed equipment to satisfy new production contracts or to acquire the equipment and inventory of a competitor that has not been so lucky.
We have been fortunate through our network of lenders to finance equipment purchases from as low as $75,000 to as high as $24-million. Each of these clients are now friends and we remain the best access to capital for all of their growth and expansion needs.
The recent changes in the economy with the introduction of the coronavirus and the reality that the entire economy has been brought to its knees, one would think that any business or broker looking for capital would take even a brief moment to see where they fit into the big picture and how a lender will look at their business, history as well as future opportunity.
To help every small business looking for funding at this time here are a few suggestions, ideas, requirements and just plain common sense realities that will set the stage for your success and the money you need or another denial because your financials are just not ready for prime time.
Current Credit Markets
The credit markets have always been a complex web of banks, hedge funds, big corporations, brokerages and the Federal Reserve. There was a time where capital flowed freely into almost every sector of the economy back in 2008 which ultimately caused one of the most devastating financial crisis situations in U.S. History. Although the equity markets kept going up there were short term issues that began showing in late 2019 even though there continued to be more and more lenders coming into the business and personal lending space. Credit was easy to obtain from some of the Fintech companies because of loosened credit guidelines, although they have their credit limitations the competition between them required they take on some additional risk in order to compete.
Fast forward to today – The economy is shut down for the most part, the consumer that has driven the growth of this economy is at home and not buying, 15-million Americans have already lost their jobs and we have only just started, business bankruptcies have started, travel and tourism industries are dead along with any companies supporting these industries, major manufactures are laying people of and closing factories, strong balance sheets at the end of last year are now needing huge loans to survive, well you get it the current state of the economy is uncertain at best. Now with all the bad news on the table you may begin to see the world from the perspective of a lender who has seen in the last 30-days their portfolio of paying loans immediately move to a risk category and potential write-off with some of the above mentioned now only offering PPP loans because they are guaranteed in hopes their clients will be able to continue servicing the unsecured business loan given 6, 12 or 18 months ago.
What is a Financial Presentation for any Business?
The day of a bank or financial institution being hungry for your business and willing to forgo any real due diligence into your operation are gone. So don’t assume because you think your business rocks doesn’t mean a lender will share your enthusiasm unless you prove to him or her that you indeed know how to make money or adapt to the current environment in creative ways.
What should every business looking for capital have ready as soon as it is requested by a lender:
- The companies last 2-3 years tax returns along with all schedules
- The companies last 2-3 years of financial statements including 2020 interim statement
- Profit and loss accounting for the past 2-3 years (Note if there are significant losses you will be expected to detail what was happening at that time to create the problem and have those issues been resolved)
- Details of the corporate structure and ownership
- Detailed list of equipment needed and it’s a good idea to show how this equipment is going to be used in the organization to create new revenues, solve a problem, upgrade capacity, reduce overhead, etc.
- Personal financial statements from any owner of more than 20%
- We have seen some financial presentations that also include local press on new openings and expansion plans that also go a long way in getting an underwriter comfortable with issuing a loan
- If your operation is a start-up be prepared to provide a corporate guarantee from another company or to collateralize the lease in some way with other assets that can be used to mitigate the lender risk while you are launching your new venture
What is a Personal Guarantee?
A personal guarantee is a promise from the owner or owners of a business that they will back the loan and make the payments on the loan if the business is unable to do so. This is an unsecured personal guarantee since it is not tied to a specific asset but functions as a second line of security for a lender in case there are unforeseen issues in the company or the industry.
Why do equipment Lessors and Lenders Expect It?
Equipment leasing companies have always required a personal guarantee from their clients unless the underlying company’s financials are strong enough that the PG is not considered a necessary addition to the underwriting. For the most part however a personal guarantee from the owner of a business and their willingness to offer it as part of the lease underwriting tells a lender that you think your business is going to succeed and confident enough in your abilities or idea to back it up. If a business owner requests capital but is unwilling to sign a personal guarantee that telegraphs to a credit committee that not even the main guys, principals and owners think the project is going to work and they will walk if it doesn’t go well leaving an equipment liquidator to come in and clean up the mess.
Bottom Line is if you are not willing to back up your request with a PG the chances of you getting capital are remote at best in favor of the owners that are committed and willing to get on the same side as the lender.
Why Does My Business Structure Matter?
The structure of a business matters in that the corporate resolutions will dictate what the company and its owners are allowed to do and not to do. S and C corporations operate very differently than a Professional Corporation or Limited Liability Company. An LLC is by design intended to shelter the owner from any future liability so if it doesn’t work you can walk away. If you have an LLC and need equipment financing expect to be required to sign a Personal Guarantee to mitigate the inherent risk based on your corporate structure. Often times the spouse of an LC owner is also required to be part of the PG since the LLC tax accounting and the personal tax filings of the owner are usually connected.
What happens If One Partner Will Not Sign a PG
Practically speaking this is an internal issue and not the concern of the equipment leasing lender, if a 20% owner won’t sign then that means there is an immediate risk to the lender of 20% of the funding amount, it also telegraphs that there is or may potentially be problems with the company’s future because they are all not all working together well. Regardless it’s a deal breaker for a credit committee and they will loan to another company where the owners are all committed.
Why Is the Industry I am in Important?
One would think that this would be somewhat self-explanatory but the requests we have received this past week must be from brokers and customers that have been on another planet for the past year. 2 tough industries to fund in are the oil and gas space because the prices of oil under $30/barrel and briefly below $20/barrel means that many of the companies in this space will go out of business, when that happens there equipment hits the market and with supply and demand realities in place the value of that equipment falls hard and since that is the only collateral interest a leasing company has is in the equipment it is an issue. The CBD oil, hemp and cannabis space is also of concern due to many in the space going toes up and their equipment hitting the secondary markets as is the restaurant industry for obvious reason since many that shut down for the coronavirus will never reopen.
We stated at the very beginning that we love to finance small business and see them grow, we still love it but now need to be more selective on the types of projects, the potential for the business to whether this shutdown, the expected future demand for a client’s product and so much more all come into play during the due diligence and credit decisions.
Bring us your project and we are happy to take a look but remember that following the guidance given in this article will not only serve you well to get an approval from us but also help you in the future when larger leases, more equipment and bigger facilities are needed to produce and distribute you r unbelievable new blockbuster product!!