Which Credit Funnel Works Best for Your Business?

In the finance world, there are lenders with wide credit funnels or approval criteria and ones with very narrow funnels. That means if a lender has wide credit parameters they are much more willing to approve a broad range of credit types; credits with defaults, slow payment history, inconsistent cash flow and minimal time in business. They approve the riskier credits and the borrower pays for it by paying back the loan with double digit interest rates and making large down payments to get into the finance to begin with. A lender offering a wide funnel has to charge higher rates; statistically a higher percent of their clients will default and even if they recover the asset, they will lose money so they have a smaller group of clients that will contribute to their operation and profit margin. Their model requires charging higher rates.

Lenders with narrow credit funnels which have mostly been your standard commercial banks, have a narrow set of criteria you must meet to get approved. Things required are good credit scores, consistent cash flow for debt coverage, good business financials and usually home ownership. You must fit into their box in order to get approved and in return you pay single digit interest rates and sleep well at night.

Is there a way around this if you don’t fit into a commercial lenders’ tight little cookie box? Yes, absolutely there is because there are niche or specialized lenders which are a hybrid between the two extremes. The company should seek out a lender which specializes in financing the specific equipment they are wanting to finance. This niche or specialized lender which focuses on a specific market understands the collateral better and understands the client better because often times, this lender has actually owned a business in this market. The lender will have a wider funnel yet focused on certain types of assets so their rates are not bank rates but well below high risk rates and very workable for all types of businesses. The key is to find a lender which specializes in your equipment and see what they have to offer. An experienced broker group like First US Finance can help you apply to these types of lenders since that is the business we are in and the services we specialize in offering.