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.

The implication is that there really is no better time than right now, unless we have a time machine. Which we (sadly) don’t.

The same goes for acquiring equipment for your company – there is almost no better time than when you need it. Forget market conditions, and forget trying to time things economically. If you need it and can afford it, get it. Because you can’t grow without it.

And it’s not just growth. You also need to keep pace with your competition. Imagine your main competitor showing up to jobs with much better gear than you have. Or sending out a better product, faster. Or handling customers more efficiently. These instances can only go on so long before they make a serious impact.  

Over the years, I have seen hundreds of small businesses try and “time” things, waiting for economic conditions to be perfect, before taking the plunge on an equipment investment. In almost every case, they left serious dollars on the table. The impact of new equipment, and the revenue and profits it could have produced, far exceeded whatever they saved by waiting for market conditions to be just so.

By all measures, we have a good economy right now, but there’s also a lot of uncertainty that causes companies to sometimes pause. However, I feel that this uncertainty will be static moving forward – our deeply embedded 24/7 news cycle guarantees that. News needs clicks, and clicks come from constant new content. And the most popular/clickable content is typically the inverse of what’s happening. “Storm clouds ahead” gets more play than “hey look, another nice day coming up”.  

But right now, the day is indeed nice. And new (or new to you) equipment can make it even nicer. 

But today we’re going to discuss Financial Disclosure Equipment Financing. This is where the lender needs more information to make a credit decision. In the case of Crest Capital, it’s typically because the loan amount is greater than $250k – once the amount borrowed exceeds that, we will need more information.

(note, as I went over last time, that $250k threshold is ours. Some lenders, like many banks, may require Financial Disclosure for any amount.) So let’s go over what is typically needed with Financial Disclosure Equipment Financing.

Financial Disclosure Equipment Financing

For financing larger amounts, lenders will need more information, particularly on the operations and financial health of the business itself. 

Financial Disclosure will involve all the information in an Application-Only deal, plus details like tax returns for both the company and the main principals, financial statements, details on revenues, debt, assets, other liabilities, cash flow, shareholder equity, and more. 

The information checked will also increase. The same instances from Application-Only will be used (credit reporting bureaus, D&B, etc.), but will also involve an analysis of the preceding financial reports. 

In addition, depending on what is being financed and what information is already gleaned from the statements, other factors could be checked if deemed necessary. These could include an analysis of the industry, the current and future market, outside factors that could affect profitability, industry competitor performance comparisons, and more. These don’t happen every time – it depends on the unique details of the company and the applied-for financing.  

Financial Disclosure sounds like a lot of steps, but it can still all happen quite quickly – Financial Disclosure equipment financing can usually be completed in a matter of days. But for companies that are borrowing, they do understand that these larger deals will take more time. 

So now you know what Financial Disclosure Equipment Financing means – a call to your accountant (or a trip to the basement) for statements and tax returns. But it’s all for a good cause – getting you the funds you need for that major equipment purchase! 

Are you doing it? If the answer is yes, how much do you promote it? Because I have to tell you, over the years (and I know I sound like a broken record), I have seen it make a tremendous difference in the bottom line. In plain terms, offering financing closes more deals.

Now for those who are uninitiated, when I say “offering financing”, I don’t mean your company financing anything. I mean taking advantage of the free vendor financing program from Crest Capital that allows you to offer financing at no program fee and typically no credit risk to you — standard program terms apply. All you do is sell your goods like always, except you can also say “we offer financing”. Then we handle the financing part, and you get paid in full right away, like you always did. 

It’s simple, clean, and extremely effective.

It becomes even more effective in an apples-to-apples comparison with your competitors. If you offer financing and your competitor doesn’t, you automatically make it much easier to buy from you. Your customer doesn’t have to get their own financing (or use cash). You’ve also taken the “we can’t afford it right now” rebuttal off the table.

I mentioned earlier our program is free. That’s no joke – you don’t pay a penny for this. In fact, we’ll even brand it for you – supply us with your logo/artwork, and we’ll make you a professional, secure online portal that your customers can use on demand. And we’re fast too – in many cases, your customers can even get  financing approval before the sales meeting is over. Indeed, we’ve approved financing deals within hours, even from the trade show floor – a deal was made, lunch was ordered, and before the last sandwich was finished,  the financing was secured. Oh, and your customers will love our rates and terms too. 

So I ask you one more time: it’s summer 2023. Are you offering financing yet? 

Of course the big news was the failure of two Silicon Valley banks. Although looking at the reasoning and details, this is far from a crisis, and more of an unfortunate circumstance (overly simple explanation = rising rates made the bank’s safe investments not worth as much short term).

But for me, the more noteworthy part was what happened in March’s Federal Reserve meeting. The Fed ended up raising rates again. Of course, it was a small increase (25 basis points), but it signaled some interesting thoughts if you’re into reading the economic tea leaves: banks in general are just fine, and they are NOT going to back off trying to tame inflation.

Think about this – the two bank failures were at least partially attributed to rising rates. And the Fed’s response was akin to “yea, it’s unfortunate for these two, but it happens. Now, about inflation….”    

In other words, the Fed obviously feels it was a perfect storm of particular investments and widespread withdrawals that contributed to these failures, and it’s more an anomaly than a trend. 

The second thing is, even with the talk of “maybe they should back off” the fed essentially said “nope, taming inflation is too important” (I am embellishing and paraphrasing of course. Nobody said these things. But the actions make this conclusion a pretty logical one.) 

I’ve been saying for a year now that rates aren’t going to return to previous 2021 lows for a long time, and this cements my belief further. I do feel we might be getting close to peak rates, but I don’t see cuts for quite some time.

Now that I’ve done rates to death, let me discuss one other thing – the talk of a possible recession…. 

I don’t know about you, but I’ve been hearing this for an entire year now. I’m beginning to think this is going to be a perpetual thought in our 24/7 social-media-driven news cycle, and people say it just to say it. As I’ve alluded to in a few recent posts, demand is still here, people still want goods and services, and the jobs outlook continues to be strong – there are more jobs than workers to fill them. I think we’re going to level off nicely, without a recession. 

So in the end, my outlook is considerably brighter than the news. Maybe you should come here more often!   

Fletch,

I’ve been reading your thoughts about rates but I’ve been holding off getting new gear because I was too scared to borrow when rates were rising. I clearly should have a year ago but that’s hindsight. But today even though I really need some new machinery I’m still hesitant to commit to a long-term loan because rates could start falling. A friend of mine suggested I lease but I’m hesitant there too. Can you talk me into it?

First of all, smart move in asking The Lease Guy to talk to you about a Lease!

But yes I do understand your dilemma and it’s not uncommon. For people who have held off buying equipment the past year, they are almost to the point where they feel like they must stay the course.  

I will say I don’t think rates are going to lower, so you’re probably safe in just financing what you need. But you asked me to talk you into a lease, so here goes:

Get an FMV Lease, which stands for “Fair Market Value” lease. Take it out for 24 to 36 months. This means you aren’t locked in as long as a traditional loan, but most importantly, it gets you the equipment you need right now. And at the end of the lease, you have the option to buy the equipment at the fair market value. If rates are lower and you like what you have, go ahead and buy it. If neither of those things are true, hey, lease another. 

Now, because an FMV lease might be an operating lease, it could be structured so it isn’t on your books as an asset, meaning you can’t take a Section 179 Deduction on it. However, as it IS an operating expense, you can deduct the lease payments on your taxes. While it’s not as big as Section 179, it’s still pretty attractive.

Plus, with the FMV lease, you’re really only paying for the portion of the equipment’s life you are using, which means your payments are going to be pretty manageable.

Lastly, whatever your feelings are, it’s never a good idea to “need” new machinery or equipment, but not get it. It’s hard to competitively operate that way. So if the lease gets you the equipment now, and you feel good about the financials, there’s almost no downside.

Hope that helps! 

I appreciate (and somewhat share) the optimism, but my initial response to that is “not so fast”.

On February 7^th 2023, in response to a much-stronger-than-expected jobs report, Federal Reserve Chairman Jerome Powell said “We didn’t expect it to be this strong”. He then further expanded on this, saying “It kind of shows you why we think that this will be a process that takes a significant period of time.”

Powell also mentioned that it will take more than a year for inflation to get back to 2% (the Fed’s target).

Let’s unpack this for a moment.

The Federal Reserve has been raising rates to combat inflation. By raising rates, the hope is they slow the economy (by curbing demand), allowing inflation to fall. But while inflation has shown signs of peaking/slightly falling, the economy remains quite strong.

What this says to me is rates will keep rising for the foreseeable future. Probably by small amounts (say 25 basis points at a time). And then when rates peak, they will hold fast. I’ve been saying this for a while, but it’s definitely coming to fruition – rates are going to stay at the levels we have now (and go even a little higher from time to time) for a long time. Too long for anyone to wait out.

What Can You Do About This?

Simple: do business in this environment. You have no choice. Rates are not going to return to 2021 levels for a long time (if they ever do).

The good news is rates are still quite manageable – they are only “high” in the context of the past few years. There are plenty of successful business owners right now who paid much higher rates when they were starting out in the 90’s and early 2000’s. Taken into historical context, borrowing money is still quite inexpensive.

Stay the course folks. Business is still getting done, and customers still want what you do.

All too often, companies enter into financing and leasing agreements with all kinds of draconian covenants and restrictions in the fine print. These restrictions (like blanket liens, minimum bank balances that must be kept, and requalifying for the loan annually) can severely limit a company’s operations, and yes, cedes control over assets to the lender. 

Here’s the thing with these restrictions: they are there to protect the lender, and allows them to offer a lower rate than a lender that doesn’t have restrictions. For example, a blanket lien ensures that if a borrower defaults, the lender can come in and “sell it all” to recoup their money. 

So today, in late 2022, when rates are rising, it’s likely that many borrowers are going to look a little harder at the rate. But I PROMISE you this: the lowest rates you find will also include these restrictions. So please be aware of that. 

Your credit score won’t matter, and your relationship with the lender won’t matter. It’s lending algorithms – the lower the rate, the higher the restrictions. It’s the way the lending industry works. 

To give an example, my company, Crest Capital, does not include these types of restrictions. And we can do this for two reasons: we only lend to good credit companies in stable industries, and our rate, while near the bottom, is not THE bottom. And while we’re not for everyone, our customers find our rates and terms very favorable to how they want to operate. 

The bank will have a lower rate, and they’ll want control over your assets in return. Is that a good trade-off? That’s not for me to answer. But in this environment of rates going up, I do feel the need to post this and make companies aware of the relationship between rates and restrictions – the lowest rate will always have the highest restrictions. 

For example, I posted a “why aren’t you offering financing?” series in January of 2020. Just one month after I posted, we began hearing about a possible Pandemic. Then a month later, the pandemic happened. And you know what else happened? Credit exploded. With shutdowns looming, companies did not want to spend a dime of their own money, so they borrowed and financed equipment in droves. 

Like everyone else, we worked from home, but were quite busy. And you know what took up a TON of our time? Helping our best vendor partners better offer credit to their customers.  

We have hundreds of vendor partners. Every one of them is important. But there are a certain percentage of them who truly embrace offering credit and monthly payments, and use financing as a selling tool. They already know, beyond any doubt, that offering credit raises sales. So they proactively employ it.  

For those vendors, our help was there for the asking. We worked with their salespeople, helping them better present financing. We assisted with marketing collateral. We worked out “as low as” price points for their websites. And for the most prolific ones, we worked out special payment schedules and similar. 

This all mattered immensely to our best B2B vendor partners. When the pandemic hit and business seemed quite “iffy”, we helped them take advantage of the sudden increased interest in credit, and for a great number of them, sales held serve during a very challenging time. 

So this begs a question to companies who already embrace offering credit: How much does your finance partner actually help you?  

At Crest Capital, we see it as a true partnership. A two-way street if you will. 

Many vendor partners don’t really want to push credit, and that’s ok. We give them some self-service tools, and financing is there if they need it.

But there are other vendor partners who proactively view credit as a vital sales tool (which it is). And together, we do some interesting, revenue-driving things. 

Do you have a vendor partner now, but haven’t seen much interesting (or revenue driving) lately? Maybe it’s time to talk to a vendor partner that actually does those things. 
I’ll discuss specifics in the next post, but suffice to say, if you’re interested in more revenue from your financing program, then we’re interested in talking to you.

A customer was in the process of buying a new machine they needed, and the rate hike happened right in the middle of their “which of these two models should we buy?” discussion. And since like most businesses they were going to finance the machine, they briefly discussed not going through with the purchase.

The interesting part was it wasn’t the actual rate itself that caused them to consider bailing (even with the hike, rates are still historically low) – it was the fact that since they (in their words) dragged their feet on picking a model, they “lost”. Had they decided just a week earlier, they would have gotten a lower rate.

They decided they still really needed the equipment, so they went through with it. But in talking about this, I made them feel better by telling them rates were almost certain to rise again and again, well into the next year or more. So looking at it THAT way, well, they locked in before more increases.

That means they actually won. Imagine that? 

Look, I know I’m in equipment financing, and I’m going to be bullish on financing no matter what. But I bristle at a reluctance to finance because of emotional reasons like “oh, we could have paid less had we done this last week”. To me, that’s silly. 

This is because while the “we could have paid less last week” is technically true, it’s a blip in the overall success of a business. If you need the equipment, you need the equipment, and that should come first. As I mentioned in another post, people and companies still need things done. Are you planning on doing them, or not?  

I’m not telling you everything is rosy and not to pay attention to rates. If you are thinking about an equipment purchase, you’d be wise to do it before the next Fed meeting (July 26-27), or definitely before September’s (September 20-21).

But if you need equipment after that, don’t sweat it. You’re still going to lock in before rates go up more. Plus, you are going to get equipment that matters to your business. And that’s a win anytime!