Paul was very adept in his trade, having worked in it for over a decade. He had diligently paid down his home loan and had a good piece of equity in there. Unfamiliar with business loans or how banks worked, he had gone to his lender to ask for advice. He’d been referred to a small business banker who hadn’t called him back. A friend had told him to speak to me about financing some equipment.
Paul had a great credit character. This was illustrated by his good job stability, repayment history, equity position, and clear credit file. I asked Paul what he wanted to do. “I need to buy about $70k worth of equipment before I can go on my own. I’ve found the goods, but I don’t know how to get the finance”. Paul thought he needed a small business loan, however, he was buying equipment. Equipment is great collateral because it can be repossessed! As negative as that may sound, this is how the banks think. If they have ‘security’ or ‘collateral’ you’re going to get a better rate, and a higher chance of approval. I would add to this that the process is a lot simpler and straightforward then a small business loan that is unsecured. I discussed the equipment loan structure with Paul, and we worked through some cash flow forecasts based on his industry knowledge.
With a start-up, we must illustrate the affordability equipment through he business’s performance. In addition, the banks sometimes like to see what we call ‘hurt money’. This means the banks want to see you as the borrower put some of your own cash on the line. So for Paul, we quickly arranged a refinance (to a much better rate of course!) and a top up so that he’d have some hurt money to throw in.
Suffice to say the lender approved the equipment loan off the back of his good character, cash flow projections, collateral and hurt money – the perfect mix for success!
Paul is now about to set up shop for himself, a dream he has had for many years, and one that was well within reach once he realized how to go about arranging the finances. So, if you need equipment, talk to Liz about equipment finance!