Let’s move forward in our “why an equipment financing company beats the bank” by hitting our halfway point. Reason #5 is a simple one that should hit home for most of you – it’s “Financial Statement Covenants” (or “peeking in your window to see what’s going on”).

Ok, you say that doesn’t hit home because you don’t really know what that means… no problem, let me clear it up. Basically, what it boils down to is this: the bank is going to be VERY interested in your businesses financial health – both now AND later. The will constantly look at things like your maximum debt to equity ratio, whether you have a loss in consecutive quarters, etc. And if any of these conditions are met, they will have the right to call in the loan (which could mean sending out Bruno.)

Why is the bank interested in that? Aren’t ebbs and flows part of doing business? What happens if you have a bad few quarters… sometimes, that happens. Let’s pretend something: you’re a manufacturer of boats, and your biggest customers are on the Gulf of Mexico – you sell hundreds of thousands of dollars of boats and equipment to fishing companies and tourism companies. Then this big oil company (who shall remain nameless) forgets to turn off a switch, and BOOM, an oil rig explodes (ok, that’s an extreme – I think it’s more than one switch, but I digress). Oil leaks into the gulf, affecting everything from fishing to wildlife to tourism to… well, all of it, really. So one after another, your customers call you and cancel new boat orders – seems like this could be a down year for them (gee, ya think?)

So, in a roundabout way, YOUR business is affected – it’s going to be a down year for you, too. Yes, you’ll survive, but you will post three or four losses in a row – can’t be helped.

Oh wait… that’s going to be a problem, because you took out a bank loan last year, and they have a covenant saying “no consecutive losses, or else”… your mind wanders, eventually settling on Bruno, a tire iron, and… ok, this is fiction so we’ll leave it at that.

The point is, the bank is all nosey about your business, both when they give you the loan and later. And us equipment financing companies? We really don’t care. And while we do have a guy named Bruno here, he’s in charge of interior decorating, and hates getting his hands dirty.

Ok, let’s continue our series on why an equipment financing company is better than the bank. And we’re up to reason #4, which is “compensating balance”.

Now what is a compensating balance? Well, it’s nothing more than the bank saying “hey, we loaned you one hundred thousand dollars… the least you can do is have thirty thousand dollars in an account with us. Oh, and let’s not touch that money, ok?”

Oh really? That’s the least we can do? Let me tell you something, Mister (or Ms.) bank person – if we had thirty grand in an account just sitting there doing nothing, we probably wouldn’t need the loan, would we?

Sheesh… but yes, that’s often how it works. The bank will typically require you to carry a big bank balance (usually 30% or so)… one that they’d rather you didn’t let go down, either. They call this a “compensating balance”, basically meaning “we loaned you money, you can compensate by having a good chunk of that money here with us…”

It’s almost bizarre, isn’t it? They loan you, say, $100,000, but require you to keep $30,000 in an account with them. So they are really only loaning you $70,000. The rest is actually YOUR money. Plus, doing that plays games with your interest rate. Say the loan interest is 7.5% – but if you factor in the point that you are required to keep 30% of the loan in the bank, the real yield for them is 9.33% (warning – math ahead )

• Let’s just do a simple example with one year, and a nice round number, like $100,000 at 7.5% interest. In that scenario, you are going to pay $7,500 in interest, and the bank will be more than happy to let you assume this: $100,000 x 7.5% = $7,500. Simple, right?
• However, because of the compensating balance, you’re really only borrowing $70,000.  So $70,000 x ? = $7,500. To get this, we’ll divide (you remember math class, right?)
• So $70,000 / $7,500 = 9.33% – this is the rate you are actually paying.

Obviously, the bank loves this little game. You pay more, plus, it ties up your cash.

Now let’s shift to an equipment financing company. We really don’t care what your bank balances are, to be honest. Oh sure, your assets will come into play when we approve you, but there’s no restrictions on how much you keep in the bank afterwards. So the rate you pay us is the real rate – no games, and you are free to do whatever you want with your cash. Exactly like it should be.

Oh, and very little math, too!

You know I can’t go more than 3 or 4 posts before I mention Section 179. And being that we’re right smack into the height of tax season, I figured now would be a great time.

So how did you do? You saved a bundle, I hope. Because last year was a GREAT year for Section 179. The limits were very generous (up to $500,000), and really allowed for businesses to clean up.

But if you missed out – do not despair. Section 179 is still here, albeit a little smaller. Ok, a lot smaller. Like $375,000 smaller. This year, the total deduction is $125,000. Yes, that’s a far cry from last year, but you know, it’s still something – we could have nothing (after all, our grandparents didn’t have Section 179. That must have really angered them as they walked to school uphill in the snow – both ways.)

I said all year last year to take advantage of Section 179. And I’m going to say it again this year, because if left unchanged, Section 179 will shrink further (in fact, it’ll go all the way down to $25,000). Now, I did say “left unchanged” – our leaders seem to like Section 179, so here’s hoping that it’ll get raised at some point. But then again, it is an election year, and Section 179 is not a hot button issue, so there’s a good chance that $125,000 we’re getting this year will be the best we’ll see for some time.

So that’s my message here for tax time – there’s still this great government program that’s just itching to give businesses who spend money on equipment a nice break. But you can’t put it off – the equipment must be purchased and put into service this calendar year.

Have a happy tax season, everyone (bet this is the first time someone wished you that!)

Let’s keep going with our ten reasons an equipment financing company is better than a bank with reason #3, which is cross-collateral (or as we like to say, your first born.)

Ok, let me be honest – the bank probably doesn’t want your first born (especially if he or she is still in the diaper stage – yuck). But, the bank WILL look into cross collateral for your loan. And if you are a small business, that might mean your personal accounts.

That’s right – if you secure an equipment financing loan or an equipment lease through the bank, they will very likely put in a clause that blanket liens all of your assets “now… and hereafter acquired”. This includes personal assets, so your house, your boat, your kid’s college fund – all of those can be technically tied up with your equipment loan. So when it comes time for junior to go to college, he (and you) could be in for a big surprise if the equipment loan you took is still outstanding.

This is called cross collateral, and it’s quite common with the bank. When you take out a loan, all of your personal business and assets can be tied up in the legalese. And since it’s in legalese (and also in 6pt font), you may not really be aware of this. But yea, they get tied up, preventing you from borrowing, selling, or otherwise using these assets without the bank’s specific permission. Now, will they keep junior out of college? Well, we hope the bank isn’t that evil, but then again, why take that risk?

Contrasting this, an equipment financing company (like mine) will file one UCC financing statement on the specific asset we are financing. If your kid’s college fund isn’t on there (and we’re really not interested in that anyway), you are free to do what you wish. In other words, we don’t care about your other assets, and will leave you (and junior) alone. He’s free to go to college and attend all the keg parties he wishes (not that ol’ Fletch would know anything about that, mind you – I studied all throughout college. Indeed I did.)

We’re continuing with our “ten reasons an equipment financing company is better than the bank” series today with the second reason – and that reason is that upfront costs are lower.

So there you are, contemplating financing a new (or even used) piece of equipment. You’re financing this equipment because like many companies, you’d rather keep your cash liquid. Which makes sense – everyone likes more cash on hand.

You walk in to your friendly neighborhood bank, and sit down with the loan officer. After exchanging pleasantries and a brief conversation about the weather (“been hot lately, huh?… “I’ll say”), you get down to business. You have a piece of equipment that will cost $50,000 – let’s work out a deal.

The bank officer looks things over, and finally says “ok, here’s a check for $40,000”.

Huh? 40k? But… but the equipment is 50k.

“Indeed” says the bank officer “but we only finance 80% of it. You have to come up with the rest.”

You stand firm… “But wait a second. The only reason we want to finance this is to keep cash liquid – you’re telling me that we have to take out a loan, but STILL need to put a lot of cash into the deal? I thought we had a better relationship than that?”

“No, we don’t” says the bank officer*

*full disclosure – this part is fictional. Instead of saying this, the bank office will comment on the weather again. But this is what he or she means.

 
And thus ends the trip to the bank. You didn’t even get to ask the loan officer about financing the soft costs, like tax, shipping, and installation (which would have resulted in more weather talk.)

Now let’s see what happens when you talk to an equipment financing company:

You: “We would like to finance a 50k piece of equipment. We want the entire cost to be financed, plus the tax, shipping, and installation.”

Equipment Financing Company: “Ok.”

You (puzzled): “Err… that’s it? Umm… it’s hot out, isn’t it?”

And yes, that’s really it. Reason #2 the equipment financing company is better than the bank is a lower upfront cost to you, because we’ll finance 100% of your equipment, including the “soft costs” like delivery, installation, etc.

And if you like, we’ll even talk about the weather.

SIMPLICITY!

This is reason one of my ten-part series “why an equipment financing company beats the bank if you are looking to finance or lease equipment.” The fact of the matter is this – the simplicity of working with an equipment financing company trumps the painfully thick paperwork file the bank will want you to sort through.

C’mon, let’s go to the bank and ask them for a loan. First, we have to wait while sweet Mrs. Swanson picks out her new checks (I see she went with poodles this year.) Now we sit with the loan officer…. And he has us fill out a loan application (3 pages). Then he wants our tax returns for the last 4 years. I think they’re in the back of the storeroom, behind those old copiers that don’t work but we’re saving because… ok, we don’t know why we’re saving them. Then he wants our financial statements. This means going to the accountant, who is always incredibly busy and lets us know this intrusion is really not appreciated. Oh, let’s not forget to list all of our collateral… we did bring a list, right? With proof it’s worth what we say it’s worth (otherwise, we may need an independent assessment). And HOW much is the minimum balance we plan to keep in the bank?

Ok, we get it all together, and wait… a week. Or two. They’ll get back to us.

The above is fairly typical. And a lot less fun than it sounds (and it doesn’t sound all that much fun, either.) Maybe the only saving grace is the bank might give you a lollipop.

Now let’s go to my equipment financing company to get the same loan.

We go to an online form from the comfort of your office (boy, you have a nice office!) We fill it out – took maybe five minutes. We get an answer in a day. A big fat YES!!!

Errr, that’s it? Really?

Yes, really, that’s it. An equipment financing company is so much easier to work with, it almost boggles the mind. We don’t like paperwork, and we don’t like waiting around. Sure, we don’t have poodle checks and lollipops, but you’re ok with that, right?

That’s just one reason an equipment financing company is better than a bank. There are nine more to come.

You read it here folks!!                Posted on January 6, 2012

Ok, let’s predict sports first, because we’re all still in a sporting frame of mind. For the Super Bowl, I see… the NY Giants. I know, I know, a lot of you think I’m nuts, and that Green bay or New Orleans will win – I say no, and Eli Manning will throw another crazy pass, and the NY Giants will win. Mark my words.

Errr… wow

I get asked all the time about an equipment financing company (like mine) vs. the bank, and which is better. Of course, I think the equipment financing company wins hands down, but aside from my belief, I came up with ten solid reasons why an equipment financing company beats the bank if you are looking to finance or lease equipment.

I’ll list all ten in this post, and then go over these one by one in future posts – this gives me something fun to post about in between all my Section 179 cheerleading, and also gives you a reason to keep seeing Fletch.

To start, I want to make people aware of equipment financing companies, because many don’t know they exist. Usually, when a company needs money, they THINK they have three options – the bank, rich Uncle Chester, and Knuckles McNulty, who hangs around the pool hall. And of those, the bank is the most attractive.

But there’s a fourth option, and it’s the best of the bunch. An equipment financing / equipment leasing company exists solely to lend businesses money to acquire equipment. We’re better than the bank, and our offices are decidedly nicer than the pool hall (in fact, you can do everything online.)

And here are the ten reasons an equipment financing company is your best choice:

1. SIMPLICITY – We’re easier to work with than the bank.
2. UPFRONT COST – Our upfront cost is lower.
3. COLLATERAL – Our collateral requirements are less restrictive.
4. COMPENSATING BALANCE – We’re not going to ask you to keep a big bank balance.
5. FINANCIAL STATEMENT COVENANTS – We won’t pry into your ongoing finances.
6. PERSERVING CREDIT AVAILABILITY – Using an equipment leasing company allows you to still use the bank later.
7. HIDDEN CHARGES – there are none.
8. ACCOUNTINGANDTAX – Your accountant will love us.
9. RATE ADJUSTMENT – We liked fixed rates. The bank doesn’t.
10. RE-QUALIFY EVERY YEAR – We won’t ask you to prove your financial worth year after year.

I’ll go over these in more detail over the coming weeks / months. Look for them.

I know, I know, I harp on Section 179 all the time. I tell you to take advantage of it, or you may miss out. You read that so much here, you must think I’m a broken record (insert joke again about nobody knowing what that will mean in a few years…)

But seriously, I say it all the time – use Section 179 before it goes down, or even goes away. And while you’re at it, combine it with equipment financing to really get some bang for your buck. Over and over I say it, and I always warn that the gravy train may end.

Well, this time it did. Did you listen to me? Did you take advantage of Section 179 before the New Year? Because if you didn’t, you lost out. The Section 179 deduction WAS $500,000 for 2011. But you know how much it is in 2012?  $139,000. Yes, it went down that much (don’t yell at me – I had nothing to do with this – hey, I tried to warn everyone!)

But here’s the good news – that’s still a heck of a deduction. And it’s for 2012 only. In 2013, Section 179 is scheduled to go down even MORE – all the way down to $25,000. And it’s an election year – the politicians have a lot more to do this year than worry about amending Section 179, so there’s a good chance this is going to stay just like it is (in these times, with things like Occupy Wall Street going on, do you think business deductions will be all that popular with people? I know Section 179 is a good thing, but it can easily be twisted to be seen as helping wealthy people – after all, it’s still sometimes known as the “Hummer Tax Break”.)

So here’s my advice – take advantage of Section 179 THIS year. Don’t miss out again. Call an equipment financing company, get yourself an equipment lease, buy some equipment, and write it off. Take advantage of the six-figure tax deduction while it’s still here.

Have a great day, everyone!

If you follow my blog here at “The Lease Guy”, you know Fletch likes to predict things every January. Of course, none of my predictions come true, but hey, that’s just semantics. And as Mrs. Fletch will attest, I am a stubborn guy – one of these days I will get it right. So this has nothing to do with equipment financing, equipment leasing, or Section 179 (ok, that last part is false – I do mention section 179 later).

Ok, let’s predict sports first, because we’re all still in a sporting frame of mind. For the Super Bowl, I see… the NY Giants. I know, I know, a lot of you think I’m nuts, and that Green bay or New Orleans will win – I say no, and Eli Manning will throw another crazy pass, and the NY Giants will win. Mark my words.

The NHL will see The NY rangers… I know, a NY double dip (sorry), but I don’t see anyone playing better than they are, and they will have the hot goalie.

In basketball, you just have to go with Miami. They’ll learn how to play together this year and bring it home. And Baseball… I’m going to go out on a limb and predict the LA Dodgers return to glory this year.

We have a HUGE political year this year – it’s time to elect a new President. I did not predict the last election, and I won’t this one. I just don’t get too involved with politics. But ok, you look to me for advice, so I’ll say something here: a republican or a democrat will win. I’m “all-in” on that one.

But let’s talk the economy – We had a good holiday shopping season (so the retailers tell us). That’s usually a decent indicator of the national mood. And it would appear the national mood is rising ever so slightly. It’s about time – the doom and gloom of the last few years is starting to thaw ever so slightly. Let’s hope that continues.

The Mayan calendar predicts the world will end on 12/21/2012. I’ll go out on a limb and say I disagree. But I will say that I predict “some” kind of earth-shaking event. We’re getting close to finding some type of microbial life on other planets – maybe that’ll be it. Or some kind of discovery. But there will be “something” big.

And there’s your 2012. Now go to Vegas and throw a few bucks on the Giants – you just can’t lose!!!