I want to discuss a particular aspect of equipment financing that many businesspeople really don’t understand. And that’s the difference between what I call “straight” financing (like what my company and other lending institutions do), and speculative / investor type financing (like venture capital / TV shows like Shark Tank, etc.)
I need to write about this because many businesspeople think *all* financing is somewhat speculative. And that simply isn’t true.
Most lending institutions, from equipment financing companies to the bank to credit cards, all the way to “rent to own” places, all lend money with the expectation it will be paid back, with interest. And as I’ve discussed in the past, interest rates largely reflect the risk taken – the higher the risk, the higher the rate. But the basic premise is the same – they lend money, and charge interest.
In other words, these institutions generally do not care about a businesses’ idea or potential. All they care about is the raw data (i.e., credit score, income, and other similar “real life” factors), and they base their lending decision and rates on those factors. The personality or persuasiveness of the owner, or the “business idea”, carries no weight whatsoever.
So essentially, equipment financing companies, banks, and other “name” lending institutions that charge reasonable interest rates do NOT engage in startup financing, or lending money to companies without a good track record.
And believe it or not, this is very, very surprising to many businesspeople, because they watch Shark Tank or read about how venture capitalists give startups with good ideas money. But that’s a totally different kind of financing, where a venture capital firm or rich individual exchanges money for a “piece” of the business. They do this because they believe in the idea (or the owner), and see the potential reward being worth the risk. Most of these ventures fail, but when they do hit, they can hit big (think Apple Computer).
So that’s the big difference between the two – equipment financing companies make decisions based on hard numbers and past performance. Venture capitalists and other “investment” type companies take the idea into account, but they will want a piece of the business in return.