I say “finally” because to many people, the credit score is the be-all, end-all of borrowing. And it is true that credit scores and related risk factors are important, but not always in the way people think.   

I look at credit scores and related two ways: in one way, they can be a gatekeeper. Lower than, say, 650-700, and many higher-quality lenders are going to turn potential borrowers away without considering anything else. This is why many people consider them super important (and they are).

But in terms of affecting the rate, we have to already assume a borrower has met this minimum threshold. So from that point, all of the other factors I’ve already discussed have approximately equal or even greater impact on the rate.

Here’s why: while your credit score is impactful, not all credit scores are created equal. Two different credit reports each with a 700 score could have very different paths to get there. Maybe one has a thick file with 20 years’ worth of history and the other has a thin three. The 20 years speaks a lot louder. 

But it’s not just FICO scores. There are several other scoring systems like D&B’s PAYDEX, SBRi, Experian’s Intelliscore Plus, Equifax’s Payment Index, PayNet MasterScore v2, and even FICO SBSS for small businesses. Many lenders will also use public records (suits, liens, judgments) in not only making decisions, but helping to determine a rate. 

Any or all of the preceding reports and scores are utilized by most commercial lenders on most loans. For Crest Capital, we utilize many of these in our application-only loan process (deals $150k and under).  

But besides scores, what else could affect your rate? There are a few other overall factors that most lenders will look at with almost any type of loan:

• Industry Risk – Certain industries are riskier than others. For example, the restaurant industry is extremely volatile, with new openings experiencing an 80% five-year failure rate. However, over that same five-year period, the self-storage industry has a low 8% failure rate. So, all else being equal, who would you rather write a five-year loan for? And who should get a lower rate? No brainer, right? All industries have a risk factor, with the more stable ones typically getting better rates. In fact, many lenders won’t even engage with riskier industries.

• Economic forecasts – There’s always a bit of a crystal ball with lending. How is the economic forecast? Nationally? Industry-wise? Locally? These are all going to matter.

Hopefully, this blog has given you a good insight into how credit scores and other factors can affect your rate. If you want to learn a little more about Crest’s process and what we look for, check out our Equipment Financing Credit Requirements page.

First let’s talk about liens in general. In business/lending, a lien is when a lender claims the right to property belonging to the borrower until the debt owed by that borrower is discharged.

The mainstream talk on liens is usually related to vehicles. You don’t pay your car loan, and your car gets repossessed. And you cannot sell your car until the loan is paid off, and the lender discharges the lien. And of course, you should never, ever buy a car with a lien on it.

But liens can extend to any piece of tangible equipment. Very often, if you borrow money to buy a piece of equipment, the piece of equipment itself will have a lien on it. And that’s expected and fair.

But what a blanket lien does is it blankets your entire company with a lien. This means everything your business owns has a lien on it. So if you borrow money from the bank to buy, say, a new delivery truck, they will put a blanket lien on your company so everything your company owns will have a lien on it. Not only can you not sell that new delivery truck, you can’t sell the old, long-paid-off one either. You also can’t sell any machinery, tools, or anything else. 

Technically, you can’t even give anything away. Maybe you want to give your old office computer to your nephew… better check with the bank first. Because legally, they have the rights to that computer. I’m not saying they would deny that, but that’s not the point: legally, they can. 

Blanket liens are pretty cut and dried, and very enforceable. They also smother your company because you cannot sell anything without the bank’s permission (and no astute buyer will buy anything with a blanket lien in place). This severely restricts your finances and your flexibility.

It’s always my standing recommendation that you avoid lenders who use blanket liens altogether. But if you must use a particular lender who employs them, try and negotiate that clause away (it’s probably futile because it’s rock-solid protection for the bank, but you can ask.) 

Next up – compensating balances. 

But what I’d like to talk about more are the restrictions that almost all banks use for business lending. I haven’t talked about these in a few years here, so 2024 seems like a good time to discuss them again.

Before I get into these restrictions, I need to state that these are restrictions that most business lenders and nearly all banks use. But some lenders do not, Crest Capital being one of them. In fact, it’s one of the major advantages we offer our clients. Forgive the commercial, but these restrictions are so impactful to your business that we need to point that out.

Ok, the main restrictions banks use are blanket liens, compensating balances, and annual requalifying. I’ll briefly discuss them below, and subsequent posts will discuss each individually.

• Blanket Liens – This is where the bank throws a lien over your entire company, which puts a lien on every single piece of equipment you own. So if you borrow money to buy a vehicle, the bank puts a lien on everything – tools, machines, other vehicles, office furniture, etc. Since they now have liens, you can’t sell any of it without an ok from the bank. Obviously, this isn’t optimal.

• Compensating Balances – The bank will want you to keep a minimum balance in an account with them. This minimum is usually 80% of the loan. So if you borrow $100k, you need to keep $80k on the sidelines in the bank, and not touch it. So… aren’t they kind of lending you your own money?

• Yearly Requalification – The bank will look at your finances every year. If they don’t like what they see, they can call in the loan immediately in full, even if you never missed a payment. And because of the previous two clauses – they have your money locked up and a lien on all your equipment – enforcing this is a breeze for them, and a nightmare for you. 

It’s very important to be aware of these restrictions, as they are buried in the fine print, and are unlikely to be discussed with any great clarity or detail. But I’ll discuss them all in detail over the next few posts – stay tuned.

Honestly, B2B credit criteria can be complex because the answer is extremely varied, and depends on the business type, time in business, the company’s credit history (e.g., how much credit is in the business name itself), and more. 

There is no one source or definitive answer – depending on the company, we (and other B2B lenders) may look at a combination of any and all of the following: The “big 3” credit reporting bureaus (Equifax, Experian, TransUnion), Secretary of State databases, D&B (Dun and Bradstreet), LexisNexis, Thomson Reuters, Paynet, and others.  

Within these, there are a host of different types of scores that can come into play. To give an example, each of the Big 3 bureaus maintains business data and issues their own version of a business credit score; D&B has a Rating, Paydex score, Delinquency Predictor Score, Financial Stress / Failure Score, Supplier Evaluation risk rating, etc. And in the absence of a solid credit history in the company name, the principal’s personal credit scores will get an increased look. 

See why this is a complex topic? It’s not as easy as getting a FICO score and thinking that’s the number. Far from it.

Oh, regarding FICO, I need to clarify that there is no one FICO score either (this is a common misconception).  There are actually many. 

FICO scores are a component of various data supplied by the “big 3” bureaus, and 

is based on algorithms developed by the Fair Isaac Corporation (hence FICO). The tricky part is various versions of FICO exist because Fair Isaac customizes its calculation methods individually for each of the 3 bureaus (which may be further separated via specific data), each bureau modifies the score based on its own workings and  individual customer, etc…  again, there is no one score to rule them all. 

The bottom line is a LOT of data from many sources is used to evaluate credit history for B2B lending. There’s way more to it than meets the eye.

And you thought I just wrote blogs all day!

The short answer is “no, not for us”. There are lenders that have changed their requirements (specifically lenders that already took on high-risk loans), but Crest Capital’s requirements are exactly the same as they were pre-Covid.

And with that said, this is as good a time as any to go over our basic credit requirements. We’re an equipment financing company that specializes in working with successful small and mid-sized businesses looking to grow. 

So what does “successful small and mid-sized businesses looking to grow” mean in a nutshell? It means:

• Two Years in Business. No less, and no exceptions. Our favorable rates and restriction-free terms are specifically tailored to companies who have stood the test of time. 

• Demonstrated Revenue and Profit. Again, we have the most favorable rates and business-friendly terms in the industry. But we can only offer those because our customers are already profitable. They don’t see the loan they take from us as a “risk” like a recently minted business with no revenue would. Our customers already generate sufficient revenues to make the monthly payments. To our customer base, financing equipment is a smart business growth strategy rather than a way to address a lack of revenue. 

• No bankruptcies in the past 7 years.  Pretty self-explanatory. And again, no exceptions. 

• Industry. We work with almost all industries except owner-operator tractor trailers, and we generally do not work with the food-service industry either. The good news is both of these industries have their own specialized lenders.

Note – the preceding requirements are a baseline for a blog post, and do not guarantee any approval.

As I stated, our customers see financing as a component to growth. A brand-new entity typically needs financing to simply exist, and there are lenders that specialize in that. On the flip side, our customers need financing to grow. There’s a big difference. 

We like to say “we help successful companies become more successful”.  It’s how we were pre-Covid, and it’s exactly how we are now. 

But I’m not – in fact, as an overall number, the amount of businesses accepted is not very useful (there are just too many factors involved.) What I AM going to talk about is the fact that equipment financing approval (or denial) is generally based on numbers, and not emotion. It’s really the only way we – as an equipment financing company – can do things.

This all came about in my head from a recent post on vendor-lender equipment financing relationships. Specifically, the post on vendor recourse programs. The general gist of the post was it’s a relationship where a manufacturer assumes some risk because they feel it’ll be profitable to them. Perhaps it’s because they feel they will move enough product to offset any defaults, or maybe they know their industry well enough that they think their product will help customers bounce back, etc. Either way, in this relationship, they accept some risk that we will not.

Think about that last statement for a second… my equipment financing company, simply from looking at the numbers (years in business, income, liability, credit history, etc) will say “no”. But the vendor wants to step in and say “yes”.

Sometimes, they say “yes” due to margin – they make enough profit on the sale that the “default rate” won’t matter. That’s ok – it’s still going by the numbers.

However, other times, it’s not. Instead, they feel their customers (or their industry) will buck the normal trends and default at less than the predicted rate. They are going by MORE than the numbers – they are going by emotion. Which, as a lender, I can tell you is a pretty bad way to go about things. It’s like loaning money to your brother-in-law to get his impounded car back… how do you think MOST of those transactions worked out?

Now, I’m not saying this is necessarily bad, mind you. But if you lend money to people whose numbers say “don’t lend”, they will almost always default at a fairly predictable rate (yes, shockingly, even brother-in-laws with impounded cars!) I mention this because I can’t tell you how many times I’ve seen a vendor recourse program result in the vendor being “surprised” at who doesn’t pay. But the numbers don’t lie.

This doesn’t mean we never put emotion into a decision – sometimes, you just have to go with your gut. But some thought is definitely required in figuring out which brother (in law) we can spare a dime to!