Why do the media and Congress seem surprised about the current credit crisis? I’ve been warning my clients about it for years. The effects of greed, poor money management practices and betrayal of consumers’ trust have been building and are now being exposed in every dark corner of the credit market. The days when practically any business still open could get a bank loan are long gone. The good news is that there are alternatives.
Despite the sub-prime meltdown negatively affecting the credit markets and the dramatic change in the rules of lending, it is still possible to qualify for business equipment leases. Yes, it’s tougher to get the capital you need to grow, but there are things you can do to increase your chances of qualifying for a loan or lease. Here are some suggestions that will help:
Check your credit regularly and take steps to improve your score. Underwriters have always placed a lot of importance on credit scores because it reflects the debtor’s ability to take care of obligations in a timely manner. Lenders are obviously nervous today, so a credit score of 675 or higher is even more critical. It is a smart money management practice to check your score on a regular basis and carefully review the information. In a 2004 study, it was found that 4 out of 5 credit reports contain errors that can be detrimental to your credit standing. These errors include, but are not limited to:
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Inaccurate personal information and out-of-date addresses.
- “Closed” accounts listed as “open”, like a student loan paid off but showing delinquent.
. - The same mortgage or loan listed twice.
- Major loans or mortgages that have been paid off or timely serviced not listed at all.
If you find an error on your report, write a letter or e-mail to the credit bureau. The bureau is obligated to contact the creditor who supplied them with the disputed information and then respond to you within 30 days. If you are unhappy with how the claim is settled, you can ask to have a brief written explanation added to the bottom of your credit report.
To improve your score, you need to take steps to resolve any items that are showing up as delinquent and those in which a judgment or lien has been filed. Make it a priority to pay credit cards and loans on time each month.
Pledge additional collateral. Some lenders who might otherwise turn down your application for a business loan or equipment lease may change their minds if you increase the collateral base. This might add a comfort level in the event things to south. Additional collateral might include specific assets from another business that is free and clear, rental property, or equity in a personal residence.
Exercise Caution: Remember, the only time you can negotiate is up front. Once you’ve signed the contract, you are obligated. Here are a few things to know and understand about equipment leasing:
First, use a broker and make sure he has an adequate number of leasing companies he deals with. A broker worth his salt will pick the right lender for your situation and needs. Don’t just pick a lender. Make them compete. Once a vendor has your account, there’s not much willingness to negotiate. I am very selective when I refer a broker to my clients.
Second, look over equipment leasing contracts carefully. Study the words, sentences and paragraphs to make sure you understand exactly what is being said. Make notes and question obscure language. Send the document to your attorney for review and request that changes you want be made. Have your attorney contact the leasing company to negotiate the most favorable terms for you.
Once all the negotiations are done, READ THE FINAL CONTRACT BEFORE YOU SIGN IT! I know a business owner who got burned for not doing this one step. The negotiated price for the equipment was $695,000 and in the final contract the numbers had been transposed by the lender to read $965,000. My client signed the contract without checking that and is having to pay the additional $270,000 for the equipment for that one little mistake. They didn’t check the final version. OUCH!
Third, look toward the future and ask the lender the important questions now. Will future upgrades and additional needs be provided? Will the lender help with regulatory changes? What about flexibility at the end of the lease? Know your equipment. Will it become obsolete during the lease term? Will you need more of it?
Fourth, you need to understand that most equipment leases start with acceptance or commencement of the contract. On that date, you inspect the equipment and pronounce it fit for service. Then it’s yours, even though the equipment is in a warehouse or in a truck on its way to you. Your lease shouldn’t begin until you’re using the equipment successfully. Be sure your attorney writes that into the contract for you.
Speaking of using the equipment successfully, all equipment leases include a non-negotiable clause that makes you pay regardless of whether the equipment works. Unless you love paying for equipment that just sits there, be certain it operates when you accept it. If the equipment is complicated, put an expert on it. Remember, once you accept, you pay every month, period.
Early lease termination probably is the most common problem because you can’t sell goods under a lease. You’re a lessee, not an owner. The lease termination price is usually the total of all payments remaining. Your attorney can add provisions for early termination, early buyout, subleasing and assignment to protect you, but those clauses are not going to be in the deal at all unless you put them there.
Another key provision to check to protect you when the lease ends is the de-installation date. Do you pay for dismantling the equipment, crating it and shipping it or does the lender pay for that? Don’t take anything for granted. Most form leases require shipment to anywhere in the United States. Maybe you can cap that, or limit it to a specific distance such as 100 miles. If you want to keep items, can you do so and still send back part of the equipment?
Most leases state a “fair market value” at which you’ll return goods. You need to understand how that’s calculated and what charges it includes. Good money management policies include talking with your accountant to be sure you understand the numbers and what they mean.
Equipment leasing continues to be one of the ways you can bolster your chances of getting credit during a period in our history where it can be very challenging, even for the most deserving. If you would like information about sources for equipment leases, contact Sandra Simmons at 727.448.1011 or email her at Sandra@MoneyMgmtSolutions.com
January 6th, 2009 - 10:17 am
I signed a 7 year contract for a digital telephone system which has turned out to be far more than what our very small business requires, we are paying approx £4k per annum which a year ago when we signed up was affordable, with the recession biting we are struggling to pay for this system and would dearly love to get out of it.
Have we any hope, can you suggest anything?
I was planning on writing to the Company who sold the idea to us to explain our situation, do you think it would help?
regards
Julie
January 7th, 2009 - 12:38 am
Dear Julie,
Without the benefit of having the contract to review, I can only give you ideas based on limited knowledge. However, the first thing you should do is re-acquaint yourself with all of the terms of the contract so you know what, if any, options you have. You may want to have an attorney review the contract as well, and tell you what your options are and the ramifications of those options.
Certainly contacting the company you purchased the phone system from would be a good first step. Since you signed the contract in good faith, I believe you will be expected to honor your contract to pay the purchase price for the system, but perhaps they would be willing to extend the 7 year term to 10 years to get your monthly payments down to a level that is easier for you to handle.
Another alternative would be to ask the company that sold you the system if they have knowledge of a client who would be willing to purchase your system for the remainder of what you owe on it. That way they get their full purchase price, you get out from under the system, and the other business gets a great phone system for less than full price.
Despite what the general economy is doing, which is something you can’t control, you can control your own company’s economy. Cut expenses wherever possible, research new and innovative products and services to sell to keep your customers buying, put aside 10% of your income each week as a cushion to cover emergencies that may come up and, above all, never stop promoting your business. Advertising and promotion, done consistently, is one tool you have to keep income going up.
There is an old advertising adage from back in the 1930′s – “When times are good you need to promote, and when times are bad you need to promote MORE!” – This still holds true today, especially in the current economic climate.