Reason #5 why an equipment financing company is better than a bank – Financial Statement Covenants

By | May 2, 2012

Financial Statement CovenantsLet’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.

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