Full Financial Disclosure is a traditional lending product and although the analytical and decision processes differ somewhat from one commercial lender to another the absolute core of approving all commercial loan requests is determining that the borrower has the ability and the willingness to repay the debt according to the terms granted. Some lenders will also consider the future value of the collateral when reviewing a commercial loan request but for the most part lenders want good credit and great cash flow regardless of what asset they finance.

Some lenders employ “reason to decline” and some will employ “reason to approve” philosophies as the predominant driver of their credit decisions. This is similar to “innocent until proven guilty” vs. “guilty until proven innocent”. The difference can be subtle in the finance world but the influence on the ultimate decision to approve or reject a lease/loan request can be profound and unless you are a seasoned commercial finance professional it might be impossible to detect especially when you only deal with a lender on rare occasions. Also the approve/decline focus of a commercial lender can change abruptly due to any number of outside influences.

The most important formula in determining the viability of a commercial loan is Cash Flow and most commercial lenders calculate that using a slightly different formula. Essentially this determines the businesses ability to honor their current term obligations plus the additional monthly payments for the proposed lease or loan. Many commercial lenders will also calculate “global cash flow” which incorporates the real income and real term obligations of the business, as described above, combined with those of the owners. In typical proprietary type businesses this can be helpful because it takes into consideration many of the ‘tax strategies’ of the owners, namely: minimize income and pay as little tax as possible. That works great when you’re talking with your accountant but not when you’re trying to get a loan.

The quality of the financial information you provide is critical. If your businesses financial reports are not prepared (reviewed or audited not complied) by an independent accountant they will be viewed as self-serving by most credit analysts. Additionally the analyst will have no idea if any standard accounting principles (GAAP – Generally Accepted Accounting Principles) were used in preparation of the statements and therefore they will attribute much less credibility to the information. If an analyst discovers discrepancies or amounts that don’t make sense in the statements the analyst will be much less inclined to rely upon the information presented.

The accuracy of all financial information is important and personal financial statements are routinely scrutinized for accuracy (home values, income claims, and liquid assets). When preparing a personal financial statement most individuals tend to overestimate the value of their real estate, overestimate the value of their businesses, overestimate their provable earnings and overestimate the real value of publicly traded securities. When a lender sees this it’s normally chalked up to pride and ego which is not necessarily a good thing from an analyst’s perspective. We encourage you to be accurate when valuing these types of assets because an analyst will attribute more weight to the statement if they appear to be reasonable. When in doubt… go low.

Most commercial lenders are not interested in how much new income the new asset will generate but they might be interested in what expenses the new asset will reduce or eliminate. If the acquisition of an asset will eliminate or reduce specific expenses (such as payroll) a schedule of these items and the monthly saving associated with the new asset can be helpful in getting an approval.

Most commercial lenders will require the majority owners of a business to personally guaranty any corporate lease or loan. Unless your business has a long history of obtaining commercial credit without the owner’s personal guaranties or unless the financial condition of the business is extraordinary compared to the amount requested do not request a loan or lease without the personal guarantees of the owners. Lenders are sometimes offended by this request and see it as a clear statement that the owner of the business is not willing to stand behind his company even though they are asking the lender to do so.

Information is not negotiable. If you are not willing to provide a commercial lender with all of the information they require you’re wasting your time. Most commercial lenders will sell or borrow against your lease or loan and unless your lease or loan conforms to certain established minimum informational requirements your lender isn’t going to be able sell your loan and will have little interest in holding it for term.

Not all lenders will lend into every industry, not all lenders will finance all types of equipment, not all lenders will lend in every state and not all lenders will include financing of soft costs such as delivery, training, installation and shipping. Knowing which lender will do what can save you time, effort and expense. Show the lender a complete schedule of what you want to finance and what kind of structure you require so you can find out in advance if they will provide the type of borrowing you require. Very few things are as frustrating as being declined for a loan after two weeks for a reason the lender was aware of day one.

In some cases once a commercial credit officer has reviewed the financial information you have provided he or she will want to have a conversation with the owner or CFO of the business. In addition to addressing any questions he or she may have regarding financial matters they want to see how their questions are answered and if the borrower has a deep and comprehensive or superficial knowledge of their business. This is an opportunity for you to tell the credit officer things that might not be obvious from the traditional financial analysis or financial data and to convince them you know what you are doing.

Most commercial lenders are regulated by some governmental or regulatory agency and therefore are restricted to varying degrees with respect to what leases or loans they can approve. In addition, most commercial lenders will aggregate many similar loans into portfolios and sell or finance those portfolios in the commercial paper market based upon similar characteristics. In order to make these portfolios attractive to potential investors or buyers and to drive the prices up (selling) or the borrowing rates down (borrowing) it is essential that certain minimum credit and financial criteria are met or exceeded by each and every lease or loan in the portfolio. If your credit or financial profile does not fit the formula established for the current investment portfolio the lender will not approve your request or in some cases they may approve it but do so at a higher rate or with additional security because their available funding channels will be more costly.

NOT EVERY FINANCING REQUEST WILL BE APPROVED AND NOT EVERY APPROVAL WILL QUALIFY FOR THE “BEST RATE”.

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