Clauses like blanket liens, compensating balances, and annual requalification are common and written into almost every bank business loan. They may or may not be clearly discussed, and it’s up to the borrower to understand exactly what they are getting into. 

This brings up a simple question: “can I avoid these?”

The answer is not as simple (but it can be – you’ll understand in a minute).  

If you are insistent on using the bank, there may be no way to avoid them. I would always recommend you ask about these and insist the bank discloses them in plain English. Your loan officer might be a little surprised when you mention blanket liens, but they don’t know you read The Lease Guy so we’ll forgive them.

You can ask for these clauses to be dropped, but I wouldn’t get my hopes up. I suppose for the bank’s very best long-term, high-revenue customers they might, but even then the chances are slim. You see, these clauses are part of the bank’s normal operations – they mitigate risk on loans greatly, and this risk mitigation is one reason the bank usually offers the lowest rate. 

A better, and much simpler, way to avoid these clauses is to use a business lender / equipment financing partner that doesn’t use them. Like Crest Capital – we do not use any of these clauses. The only lien you’ll see from us is the standard lien on the piece(s) of equipment we are financing, and that’s it – the rest of your assets are just that: YOUR ASSETS. We also don’t care about compensating balances, and once we say “yes”, that’s that – we leave you alone afterwards.  

Because we don’t use these draconian clauses, our rates will be a point or so higher in most cases. So you have to ask yourself, how much is a point or so of interest worth to you? To us, it’s a no brainer. In fact, to most astute businesspeople, once these clauses are pointed out and dissected, the choice is pretty easy. 

Forgive the obvious plug, but it is what it is. These restrictions are real, they hurt, and we don’t use them. Simple as that.

If you thought the bank saying “yes” when they gave you the loan was the end of them looking at your company’s finances, think again – it’s not. Written into virtually every bank loan contract is a clause that gives the bank the right to make a borrowing company “requalify” for the loan annually. And if the bank doesn’t like what it sees, they reserve the right to call in the entire loan immediately.

That’s scary. Especially since the last two clauses we discussed – the blanket lien and the compensating balance – means they can collect immediately. They can fully take that compensating balance they insisted on, and then they can seize any of your assets to satisfy the rest. That could cripple many companies. 

The really odd part is you need not default on the loan for this to happen. You could be making all your payments on time, but if your overall financial picture degrades, the bank won’t care that they are still getting paid on time. They will instead say “you don’t qualify for this loan anymore”.

The thing is, a temporary drop in any company’s finances can happen. For example, maybe you lost your largest customer, and while your sales team is working hard to replace that revenue, your numbers are temporarily down. Or a bridge on your main road fails, resulting in an unavoidable-but-unfavorable-for-you detour. And it’s going to take six months for much of your retail traffic to return. Or a hundred other reasons revenue and profits temporarily drop. It happens – that’s business.

So imagine something “temporarily bad” like the above happens, but then the bank makes it 100x worse by calling in your loan(s). Talk about pouring when raining… 

This is why yearly requalification is such a scary bank clause. It sits there innocently in the fine print, but when it does emerge, it’s always at the absolute worse time.  

So what can you do about these bank restrictions? We’ll talk about that next.

A compensating balance is when a bank requires a business to keep a certain balance amount in an account with them. This balance amount is typically 80% of the equipment loan.

The key factor is this is it’s a required minimum balance, meaning the balance cannot fall under that 80% amount. In other words, it’s money that is technically yours, but it’s kind of not, because it’s locked up and you can’t use it. 

In addition, it’s very likely this money will need to be in a typical business checking / business account that’s paying next to nothing. No bank is going to give you the special “36-month CD rate” on your compensating balance.

So here’s what you end up with: a big chunk of your money NOT working for you, that you cannot use either. Instead, it quietly sits there, just in case you decide to default.

This brings up a very valid point. If you can’t use the money in the account, whose money did you actually borrow? If you answered “it’s like I borrowed my own money” you’d be right. That’s exactly what it is, in fact.

Many companies don’t even realize this happens, because they often use their own bank for equipment financing. So they have money in the bank anyway. Even if they are aware of the compensating balance the loan officer may say “it’s no big deal – you already have your money with us anyway”. 

But that’s not the point. The point is it’s money you cannot use. And honestly, money that you cannot use but also isn’t growing is pretty useless, and not a good business practice.

If you value financial flexibility and spending your money the way you wish, look for a lender who does not use compensating balances, like Crest Capital. We don’t care what you do with your money. After all, it’s yours, and you can spend it any way you like. 

THAT’S Freedom!  

The reasons are many, but the big one is stability. Knowing what your monthly payment is going to be for the entire term of your equipment loan is important. It allows companies to better forecast and plan ahead; it allows them to set budgets more accurately; and it allows them to know exactly what a piece of equipment will cost.

Fixed rates for equipment financing can also be a hedge against rate increases, which are never well-received. It’s interesting that rate drops are never seen in quite the same light. For example, if I take out a loan, I am obviously ok with the payment. If rates go down a slight percentage, I might say “hmmm, would have been nice if they dropped last month when I financed, but oh well…” and I move on, not thinking about it again.

But if rates rise, and I’m comfortably locked in at a lower rate? Heh, then I’m imagining myself as a financial wizard, and probably won’t shut up about it.

Conversely, adjustable rates are a real roller coaster. Sure, if you get in at the exact right time and rates start falling, you’re going to be happy. But those perfect times are few and far between. And never mind rates rising and your payment going up – that will give any businessperson sleepless nights. 

The bottom line is adjustable rates are risky, and can really hamper a company if they go up. You certainly wouldn’t BUY a piece of equipment from a vendor that said “right now the price is this, but if we feel like it later in term, we’ll raise it to that”… so why would you finance under that same scenario?  

Nope, the jury is back in record time: fixed rates are better for equipment financing. Fletch has spoken. 

In plain terms, many businesses are used to the Bank’s pace of doing business. And the bank takes it really slow. In many cases, it can take several days to a week to get an approval for an equipment financing deal, never mind then getting the actual funding handled. And this is after you’ve already spent hours gathering your tax returns and financial records to bring in. 

In contrast, we built our service around speed. We’ve approved some customers for their equipment loan in less time than they spent in the bank’s lobby waiting for the loan officer. Literally, and with nearly zero paperwork.

To us, the speed and ease of equipment financing is very important. And it can be very important to our customers. Because many times, a business needs new equipment fast. There have been instances when a needed machine unexpectedly broke down. Or was irreparably damaged in an accident. And the company is in a holding pattern until they get another one. That’s never good.

Not to brag (ok, maybe it is a bit of a brag), but we’ve “saved the day” more than once, because we provided funding the very same day the machine went down. The machine failed overnight, we were called in the morning, and by the time the business day ended, approvals were made, documents were signed, and another machine was purchased, complete with rush shipping and an extended maintenance plan (that was financed as well). 

We began business in 1989, and transaction speed was our hallmark even back then. But the internet has made everything faster, and we’ve continually invested in ourselves to make our process as fast as possible. Because, as we like to say, NOBODY waits for Crest Capital! 

First things first: If you were turned down by a bank, apply somewhere else.

Banks have the strictest lending criteria, and routinely turn down businesses for a variety of reasons. Some of these reasons are good ones, and others, well, let’s say we would disagree with them. So if you’ve been turned down by the bank, try our self-assessment pre-approval tool.

You’ve been turned down by others… so what to do now?

Ok, so you’ve been turned down by perhaps us, or another equipment financing company. Or our self-assessment tool said we couldn’t help you now. That’s all a part of the equipment financing business, so here are a few tips:

1. Let time go by – Many equipment financing turn-downs are related to your time in business. Two years is a magic threshold, so if you haven’t been in business for at least two years, give it some time and apply again when you pass two years. Also, if there’s a bankruptcy anywhere in your history (personal or business), you’ll need time for that to clear as well (and it’s probably more than two years).  

1. Make sure you can easily afford the monthly payment – Besides the time in business, your numbers tell the story. You have to show a profit and have revenues that demonstrate that you can afford the monthly payment. If you find yourself making cuts to squeeze a monthly payment into your budget, you probably aren’t ready for an equipment loan. So work to get your revenues up and your company in the black. 

1. Get a business credit card – A business credit card is pretty easy to get (the previous two factors may not apply at all), and while the interest is probably more than you want to pay, it still might be a great way to both build your credit and also hold you over until you can satisfy the above two factors.

Getting turned down for an equipment financing loan isn’t the end of the world, and there’s a good chance a “no” today can turn into a “yes” tomorrow. But until then, I hope the tips above are helpful. 

To illustrate this, let’s pretend I’m an equipment financing company. I’ll loan you a hundred dollars. You agree to repay me $9 a month for 12 months. This means you will repay me $108 – $100 principal, $8 interest (hey, Fletch needs to eat too, you know).

But Joey (who is playing the part of the bank) says: “wait – I’ll loan you the $100, and you pay me back $8.50 a month, plus a little more based on the economy… maybe it’ll be as low as $8.75, but it could be as high as $10, $11, $12… who knows?”

So who do you want to borrow money from? Me, or Joey? With me (an equipment financing company), you know exactly how much you will be paying for the life of the loan. No surprises, no “oh gee, interest rates went up… sorry”. Your accountant can plan and budget.

But with Joey, you can’t plan for much. This is because Joey’s rate can change with interest rates and the economy. And really, does anyone expect rates to go lower?  I sure don’t. And to be fair, when you are borrowing for equipment, the numbers are a lot bigger than my little example above. Thus, little fluctuations in the interest rate can mean a sizable chunk of money – enough of a chunk to give your accountant indigestion. And they don’t like that.

Any businessperson will tell you – it’s better knowing than not knowing. And with an equipment financing company, you just “know” what you are going to pay, and that’s a good thing.

So tell Joey to jump in the lake. Deal with Fletch.

Here’s what you can expect with the bank in terms of hidden charges and fees:

• Compensating balances (we went over this in reason 4)
• Teller fees (huh? Was a teller even involved?)
• Closing costs (errr, we’re not buying a house, are we?)
• Annual renewal fees (Really? A fee to keep the loan active?)
• Blanket Liens (you want to put a lien on all my stuff?)
• Other mumbo jumbo (you know it’s there in the fine print).

In fact, expanding on that last statement, the fine print is a great place to hide these fees. Because nobody ever reads the fine print. Everybody knows this. So if the company wanted to slip something bad in, the fine print makes for a fine place (ha, a pun!) I’m just saying that “May cause festering boils” is NEVER in large fonts.

Now, conversely, here are the hidden fees you can expect with an equipment financing company:

• Chirp… chirp…chirp (that’s crickets chirping, if you couldn’t tell. In other words, there are no hidden fees.)

Equipment financing companies do not deal with hidden fees at all. What you see is what you get – it’s all there in black and white.

Ok, I will admit we also have fine print sometimes on our documents – our lawyer’s font size button is obviously broken. I say this because there’s nothing hidden there, and nothing we don’t want you to see.

In the end, we simply feel it’s better business to be up front about all costs, instead of trying to bury silly things like “renewal fees” or “teller charges” in places you won’t see. Yeah, we’ll make less money by not charging you “plant watering costs”, but we’ll sleep better at night.