Let the Interest Rate Elephant Into the Room

The feelings some business owners have about interest rates, when financing equipment or anything for that matter can be equivalent to online dating or anything we engage in that we attribute to the measure of our self-worth – it runs that deep. Why don’t we measure up? Are we good enough? Lots of old drama can boil up when working through a business transaction where you have to finance equipment or borrow money.

The issue is lenders are in the business of assessing risk, evaluating it, breaking it down, measuring what you have done in the past and also projecting that into the near future. It normally involves very little or no emotion so that an objective analysis can be done with an impartial decision. Business owners can play the drama in their heads, know the struggles they have had to get to where they are now and wear a medal of valor for having survived all the challenges. But that is the type of drama that underwriters and analysts stay away from. Yes, it takes formidable courage and tenacity to start a business, expand a company division, create a new product line or invent a new market product and every single person that goes down that path deserves a break but the reality is not everyone will make it. Failure can happen when the person simply stops trying due to the emotional fatigue or runs out of resources and capital or is pressured from the outside by family and spouses that come down on them to take a new course.

Therefore, not every finance application can be approved – every business owner and finance manager is aware of that. Your past performance and current business status will either garnish an approval or end with a decline; for a debt lender, the past personal struggles do not come into play. The feelings of “they don’t understand my business…” will swirl in their heads but it will not change the fact they have not met the required approval criteria.

Finance applications which are approved can have a wide range of terms and conditions and this is where the expectations come into play. Almost everyone feels they deserve the best; the best (lowest rate) and best terms. The ideal loan for a new business would be a 3% rate that they could payoff and terminate whenever convenient with no fees and no personal guarantee but this is a fantasy and does not exist. Loan rates are based on: dollar amount financed, the more money financed the lower interest rate you pay; your time in business, usually over 5 years is best; your gross sales and cash flow, not just for one quarter or one year but for several consecutive years to show consistency; credit history, D&B and FICO records with clean history without liens and defaults is vital and finally, the type of equipment you are financing, does it have a strong resale value in case of repossession. These factors all play a part in the approval process with some weighing in more than others depending on the lender.

The fact someone has been in business for 30 years and feels they deserve the best rates possible is understandable but if during that time they have had marginal profits, high amount of debt and personal credit that shows a couple of defaults and a medical lien then the reality is they will not get the lowest rates possible because they will be viewed as a higher risk profile. For equipment finance, average current “A” credit rates now are in the 5-6% range and for “B” credits from 7-9% range and so forth going up with increased risk. Yes, a bank credit line can still loan at 3-4% as long as you are a strong “A” credit and have been in business for typically over 5 years and can meet all their criteria as well but if you use your credit line for equipment then if you run into an emergency and need capital, you may have depleted your available line and be out of luck. Managing how you finance equipment and borrow capital should be a less emotional process and more focused on the clear criteria which investors and lenders specify for an approval.