Magazine article Business Credit

Keep Your Borrower Close and Your Equipment Provider Closer

Magazine article Business Credit

Keep Your Borrower Close and Your Equipment Provider Closer

Article excerpt

Are you a "credit lender," or "asset lender?" The correct answer should always be BOTH! Credit professionals are asked on a daily basis to underwrite loans and leases for collateral that is being purchased from equipment manufacturers, distributors, and/or suppliers. These professionals spend an abundant amount of time carefully reviewing the credit worthiness of their obligor. They often review credit reports, financial data, business and industry trends, etc. In addition to the time, they also spend an abundant amount of money on the credit reports, public record information, research data, technology, credit scoring models, human resources, etc. The objective for all of this effort is to make the most informed, consistent decision, in hopes of generating a loan or lease that will not result in some type of default.

Sounds easy enough, right? Wrong! While all of this may yield profitable results if you are lending to your neighbor, it will more than likely fail unless lenders start looking further. Today's technology-driven lending sector is comprised of companies that fail to have an intimate relationship with the borrowers. The finance companies offering funds across state lines rarely have the resources or desire to maintain that type of relationship. Lenders also rely on technology that will deliver consistent decisions while improving efficiencies. Again, these are great tools but unless you plan on being able to borrow a cup of sugar from your obligor, you need to investigate more. Lenders also like to believe that if you understand the asset you are lending against, that your results can also be predicted accordingly based on your ability to re-market the equipment. While this is certainly true of some of your traditional assets, one can not possibly expect to keep up with technology and its ability to be replaced or mandate the upgrade of certain equipment types. Furthermore, it is unrealistic for a lender to comprehend values of equipment in multiple industries. A credit professional may have extensive knowledge of equipment in the agricultural industry, but may know little about the telecommunication industry.

So if the traditional 3 "C's" (credit, collateral, & character) of underwriting, is aren't enough any longer, what should lenders do?

For starters, the lenders should acknowledge they are not experts in other business ventures. Most equipment suppliers would like nothing more than to spend all day discussing their products, and benefits of such products, especially if they might be able to sell you. All lenders should take advantage of a vendor's willingness to discuss their business, and product offerings. Truly knowing your vendor will do wonders to closing the geographic gaps between the lenders and their customers. The equipment manufacturers, distributors, and suppliers also have characteristics that should be carefully reviewed before one agrees to finance their equipment. Is the borrower dependent on the seller of equipment for continued servicing, or maintenance? If the supplier or manufacturer were no longer around, would the obligor have reason not to continue to make payments on the loan or lease? Here is an example: an equipment supplier that sells telephone equipment may not seem to have a high vendor DEPENDENCY indicator. Lets face it, we can all properly estimate how long the handset on your desk will work unless you throw it against the wall from time to time. However, what if the same telephone supplier was also responsible for the long distance service, internet, and mobile phone service? …

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