Even though your bank may say it is – Finance ain’t Rocket Science
After 25 years of funding plant and equipment of every description for company owners, one thing is clear – the client has already approved the machine purchase in their own mind, they know why they are buying it, what it will earn or save them and the risks involved. Click here to read more
Whether the machine is being purchased to improve the processes, required for additional contracts, or to reduce existing outsourced subcontractor costs, the business owner has already gone through a mental “approval” process or justification behind buying the gear.
All too often this very concept and what it really means is lost on the banks or at least not heard as clearly as it needs to be.
Skin in the game
What is the relative “skin in the game” if it all goes wrong.
For the bank, any default can create a potential loss and the approving officer may be “hind sighted” on the transaction to see if they had made an error in approving the loan on the information initially presented.
For the client, it gets very personal, by that I mean they typically have their personal guarantee on the line and with that an obligation to make good any debt shortfall even if that means their need to sell other assets to clear the debt or face the prospect of bankruptcy.
So, it is fairly easy to see who has the most “skin in the game”.
Good finance is not about jumping through hoops for the bank, it is absolutely about assisting the bank in understanding why the decision has been made to buy the machine how it will be paid for and the defense trenches in place in the event it all goes “pear-shaped”. This needs to be communicated well and into “bank speak”.
If it is not, either a finance approval won’t happen or if it does it will be “roped and chained” far more than it needs to be and possibly to an extent that is not ideal for the client.
Fast Track Finance approvals
We are now seeing a huge amount of finance being done simply based on client profile and behavior where there is no need to provide financial information.
Many assets (vehicles and smaller excavators etc) up to $150,000 are being automatically approved where the client is:-
• 3 years in business
• A property owner (if not a 20% deposit is required)
• A good credit history
This fast-track finance also applies to larger acceptable assets up to $500,000 where the client is about to or has recently finalized a similar debt of say $400,000 where the new payments are up to 125% of the outgoing debt.
Other Finance approvals come down to 3 basic questions
1) Can you afford the payments?
2) If it all goes pear-shaped can you sell the gear and pay out the debt?
3) Have you always honored your commitments (historic finance report card)?
Whether the asset cost is $20,000, $200,000 or $2mil, these 3 fundamentals apply.
It is true that the larger the asset cost, the more detail is needed around these 3 questions, however, these are all in reality simply subsets of these 3 fundamental questions.
1. Can you afford the payments
Does your present trading results indicate you can pay even if the machine being financed does not contribute to any additional income/profit? If no, what tangible savings or additional incomes can be “reasonably” expected?
Are there existing debts that are currently running off which will free up cash to service the new debt or are you spending money on subcontractors which will no longer be the case with the new machine?
Is the R & M cost on the existing gear become so high that significant savings will be made by replacing it?
Has the level of existing and or new work increased to a level where the extra machine is needed?
2. What’s the fallback position if it all goes pear shaped
On the asset exposure side, if a $1mil machine is seen to have a $700,000 auction value, the perceived shortfall exposure is $300,000 on day 1. Lenders can be comfortable with this exposure if they know the client has other equipment which are either wholly owned or have “equity” in them meaning the resale value is greater than their debt.
Similarly, great comfort is obtained where the business owner has good equity in property (either personal or through the business). Let me make it clear here, they are not after a mortgage, simply the “comfort” of knowing the borrower has resources which can assist in paying any shortfall if called upon to do so.
These questions simply address “if it all goes pear shaped can you sell the gear and pay out the debt?”
3. What does your report card look like
Have you always honoured your commitments and not left any financiers or suppliers “bleeding in the alley”, does your Public credit report look fine?
There is nothing complex about the areas shown above, they are in so many ways simply common sense and definitely not “Rocket Science”.
Any savvy company owner has already addressed such matters in their own mind as a function of contemplating the purchase of the equipment. After all they are the ones who are taking the real risk and will suffer the consequences of an incorrect decision.