Equipment Leasing Criteria 3

Once it’s clear that a business requires additional capital by way of Equipment Leasing, the funding source will require a list of the existing assets of the business to see if they are un-encumbered. If there are no un-encumbered assets, that pretty much kills the notion of Equipment Leasing.

Relevant assets (plus a Valuation Report) may include:

• Land
• Building
• Machinery
• Equipment
• Inventory
• Accounts receivables

Royalties, trademarks and goodwill are not included. This is because the funding source only considers those assets for which there is a ready market if the Borrower defaults.

Having evaluated the assets, a loan amount will be arrived at. Invariably, this is a percentage of the derived value of the assets

© 2007 Sanjeev Aaron Williams & Cashwerks All Rights Reserved

Equipment Leasing Criteria 2

Equipment Leasing is an Asset Based Loan with the 3 fundamental characteristics of a loan:

• The use of the equipment as collateral for the loan;
• Defined payments to the funding source;
• The payments to be made over a specific period of time

Unlike Factoring, a debt is created and the funding source will look more closely at the Borrower’s financial position to determine cash flow strength for repayments. Specifically:

• List of assets and any encumbrances against each one
• Valuation report of the business assets – this must be higher than the loan amount, after taking into account any encumbrances.
• 2 years audited financial statements from the Borrower
• 2 years corporate tax returns
• Purpose of the loan
• Amount of the loan
• Likelihood of repayment
• Any recent contracts to verify increased business
• Bio on principals of the business
• Background and credit checks on them
• Additional data that will give the funding source a complete view of the borrower

© 2007 Sanjeev Aaron Williams & Cashwerks All Rights Reserved

2 Points About Equipment Leasing

The lease does not show up as a long term debt on the financial statements of the business. The business will not own the equipment until the lease is over. Many companies resort to leasing equipment precisely because it does not show up as a debt – and thus makes the company more attractive to shareholders or potential investors.

Leasing allows companies to avoid budgetary or lack of authority restraints. Rather than spending large amounts of capital on an outright acquisition of equipment – which might need the approval of superiors and result in further delay – a company manager can lease the same equipment knowing that he is acting within his financial limits to do so.

© 2007 Sanjeev Aaron Williams & Cashwerks All Rights Reserved

Criteria For Equipment Leasing

What the funding sources look for:

1. Size Of The Deal

The smaller deals, US5,000 - $100,000 stand a greater chance of being funded, compared to multi-million dollar items.

2. How Long Has The Business Been Operating?

In general, startups and new businesses less than 2 years old, would not usually be funded. There are exceptions and some funders will gladly consider newer companies and harder to fund deals.

However, if the startup itself is intending to provide “Vendor Leasing” i.e. a leasing option to its customers that are buying its products, financing might be available – so long as its customers have been in business much longer than the startup vendor.

3. Type Of Equipment

Computer equipment, telecommunications, construction equipment, turcks, machine tools and generic machinery that is regarded as having a defined value and considered to be a liquid asset, are the ones most easily funded.

Specific purpose-built machinery is less likely to be funded, as well as equipment that has an inherent liability issue e.g. tanning beds.

4. Creditworthiness Of Proposed Lessee

This is very important as it is the Lessee that will be making the payments on the Lease.

Bankruptcies, credit card delinquencies, tax liens and judgments could damage the chances of funding.

© 2007 Sanjeev Aaron Williams & Cashwerks All Rights Reserved

Equipment Leasing in the US

It would probably come as a surprise to a small and mid-sized business to discover that Equipment Leasing in the US is a 300 Billion Dollar industry, with huge growth potential.

Think about it: to acquire a business asset, you can either pay cash upfront, get a bank loan or enter into an Equipment Leasing contract.

Equipment Leasing is a form of Asset Based Lending. Not only is it a stand alone financing product, but it can be combined with other financing such as Factoring.

While Factoring generates predictable and faster cash flow, Equipment Leasing allows a business to make strategic decisions as to the USE of that cash. Why? Because it is the use – not the ownership – of the equipment that generates cash, and ultimately profits.

Given the rapid rate of technical obsolescence, a business might decide to lease the equipment rather than pay a wad of cash for it. This allows them to get the most use out of the equipment for the time they need it, while protecting their cash reserves.

© 2007 Sanjeev Aaron Williams & Cashwerks All Rights Reserved