How to determine the best equipment financing option for your business

Tim Evans, President, FirstMerit Equipment Finance

Chalk it up to simple economic realities, but a capital expenditure requires quite a bit of forethought these days. This makes finding the best equipment financing for your business more important than ever, says Tim Evans, president of FirstMerit Equipment Finance.

“We tend to keep equipment around a lot longer than we have in the past,” Evans says. “It’s important that when you get that initial piece of equipment and you make your decision on financing that you are thinking long term, not just short term, and that you understand the value of that equipment to your business.”

Smart Business spoke with Evans about how to set up the best equipment finance agreement for your business, and what not to do when structuring the agreement.

What are some issues companies should consider when financing equipment?

Companies should think through the true economic life of the equipment. How long will you be able to use it in its current application? Can it be converted to some other capacity to lengthen the life of the equipment longer than it would normally be? Are there upgrades or refurbishments that could extend the life of the equipment?

How can companies determine whether financing or purchasing a piece of equipment is the right choice?

You can’t be short-sighted in how you use your capital today. We’re coming out of a recession, and many customers are asking for sale leasebacks because, prior to the economic slowdown, they tied up their capital in their equipment purchases. When you run into a down cycle like we’re in today, you need working capital to run your business. But when you’ve tied it up in your equipment, you’re out of luck.

Equipment financing and leasing is the way to go to avoid a shortage in working capital. If you have the ability to finance your equipment and keep working capital in your business, that gives you more flexibility. It’s very difficult to structure a sale leaseback 12 to 18 months after you paid cash for the equipment, because the equipment depreciates and its value will be a lot less at that point in time.

What should business owners look for when setting up financing agreements for leased or purchased equipment?

One of the biggest misnomers in the industry is to look for the absolute lowest rate for your equipment financing. Money is money, but when you are looking for equipment financing, you want to work with a partner who understands your business, and who understands the necessity of being able to do something different down the road if your situation changes. You need flexibility.

Often, companies get offered a below-market rate that looks great at the time they signed the deal. But what if they are two years into their five-year deal and they need to make a modification? When you go into that low of a rate structure, many times the flexibility just isn’t there because of the tight requirements in order to achieve the goals that the lessor established in the deal.

At FirstMerit, we look at it as an overall relationship. Our goal is to give you the ability to work within your business frame to make any necessary changes in how you are doing business if your situation changes.

You should look to work with a lessor that is flexible. If you just go with whoever is offering the lowest rate on the street, you’ll find that service and price don’t always go hand in hand. We will always be competitive, but we also pride ourselves on being a good service partner.

What are some typical equipment financing mistakes that companies make, and how can they be avoided?

The biggest mistake companies make is they aim for the lowest possible payment. Typically, that means you get the longest possible term, which can create a lot of issues down the road.

You might have an asset that won’t be of any use to you after five years. But you have a targeted payment in mind, and because of that you need an seven-year term. The structure of the lease, the potential buyout on the back end of the lease, whether it is a fair market value lease or a conditional sale — those are all issues you want to be aware of, because they are going to impact what happens down the road when you decide whether you want to buy that equipment or return it.

Another key point: make sure you understand the tax ramifications of your transaction. It may be beneficial to your company to pass any bonus depreciation on to the lessor (the bank) and do a true lease, because you could receive a lower payment structure. In this case, the lessor would take the depreciation benefits and then pass those benefits back to you in the form of a lower rate.

Always ask questions and make sure you read your documentation — especially the fine print. You don’t want any surprises down the road so make sure you read your documents thoroughly.

How can business owners determine whether an equipment lease being offered by their bank is a good one for their business?

There are three major components to consider. First, how long are you keeping the equipment? Can you utilize the tax benefits? If cash flow is an issue, is 100 percent financing more attractive than a conventional term loan where a 20 percent down payment may be required?

Tim Evans is president of FirstMerit Equipment Finance. Reach him at (330) 384-7429 or [email protected]

How businesses can obtain financing in a tough economy by using a CPA firm

Jeff Hipshman, Partner, HMWC CPAs & Business Advisors

Curtis Campbell, Partner, HMWC CPAs & Business Advisors

If you’ve tried to obtain or increase bank financing lately for your business, and been turned down, you’re not alone. The “word on the street” is that bankers’ lending criteria continue to be stringent. So what can you do to improve your chances? Obtain the assistance of a CPA who knows how the process works.

“Through including a CPA firm in the relationship between your bank and business, you can increase your chances of success and reduce the frustrations of the application process,” says Jeff Hipshman, partner, HMWC CPAs & Business Advisors in Tustin.

“Your CPA can also work with you throughout every phase of the process to help solve your company’s needs and meet your objectives,” says Curtis Campbell, a partner at HMWC CPAs & Business Advisors.

Smart Business spoke with Hipshman and Campbell to learn more about how business owners can benefit from the assistance of a CPA firm in securing bank financing, whether the economy is in a recession or going strong.

What is the role of financial statement reporting?

Accounting firms prepare financial statements for businesses, which are typically required by lenders and investors. Bankers analyze your company’s ‘capacity’ to repay a loan from these financial statements. This is one of the criteria that bankers use in evaluating debt repayment ability (the others commonly referred to as character, capital, collateral and conditions).

Your balance sheet and income statement, when accurate, provide a testimony over the years as to your ability to manage the business. Cash flow can be evaluated from your financial statements so that the banker can analyze your debt repayment. Collateral is demonstrated on the balance sheet and, along with notes, UCC filings and other documents, will provide the banker with key information. Your company’s equity is also an essential element that is critical for evaluation of debt repayment. It is important, therefore, to select a CPA firm that understands your business and can prepare financial statements meeting the highest quality standards.

My company should ask for the highest amount possible, right?

One of the easiest ways to let a banker know that you don’t really understand the lending process is to ask for an unreasonably high loan amount. This happens all too often, for example, when a business owner will ask for a $500,000 line of credit based on $300,000 in assets and minimal profitability. A CPA can help you to evaluate your needs and ask for the appropriate amount based on a banker’s perception of your company’s debt capacity. Your CPA can also project the cash flow cycle that your company may experience under a variety of scenarios. You will then have a better idea of your needs for outside financing.

What type of financing should we seek?

Your CPA can help to determine whether your business needs an operating capital line of credit or a loan or lease for a fixed asset. Sometimes this isn’t too clear to the business owner, who may only see that there isn’t enough internal cash flow to satisfy needs. An accountant can also do various analyses to compare costs of different financing options and your ability to repay each in a timely manner.

Are there options beyond traditional commercial bankers?

The typical business owner has a higher opinion of the company’s ability to repay a loan than does a banker. Bankers have regulatory and internal lending policies that limit their ability to extend credit. For example, banks tend to frown upon a company that has not shown consistent profitability or is highly leveraged in assets to liabilities. They also have other financial ratio criteria that must be met, may stipulate certain collateral, and might even have internal policies regarding lending to specific industries.

As such, your business may not qualify for traditional bank financing. An accountant who is experienced with such matters can help steer you toward other types of financing. While such financing might be more expensive, it may also be more useful in meeting your cash flow or expansion requirements.

Do we need a business plan?

The banking business, from a lending perspective, is all about managing risk. They lend a significant amount of money for a relatively low return, so bankers need to be convinced that your company is a good credit risk. They need to know why you want the money, how you are going to use it and how you will repay it. Your business plan should help the banker to start putting together the pieces of this picture. An effective business plan portrays your company’s objectives, management team, marketing strategy, operational structure and financial history and projections.

Accountants who have prepared business plans will know when one is needed and what should be in it. Count on your CPA to help you prepare the information needed to provide appropriate answers to a lender’s questions.

Jeff Hipshman and Curtis Campbell are partners at HMWC CPAs & Business Advisors (www.hmwccpa.com) in Tustin. Contact them at (714) 505-9000 to discuss how your company or client could benefit from HMWC’s services.


How to make your business attractive for financing

As the world slowly moves out of the great recession, banks are starting to lend more, but they’re still cautious. The best way to ensure the financing your business needs is to work with your accountant to make your organization more attractive to lenders, which starts with good business planning.

“All organizations should have a business plan — their road map of what they’re going to be doing in the future, especially a new business or an immature business,” says Carol Scott, vice president of business, industry and government for the American Institute of Certified Public Accountants.

Having a plan is critical to convincing someone to loan you money, whether it’s a bank or a venture capitalist.

“If you’re looking for financing, you have to make the business case that, ‘I have a good plan for running this business, and I have a good plan for repaying you,’” Scott says.

Planning also makes you look more put-together. Steve Christian, the managing director of Kreischer Miller in Philadelphia, says lenders don’t like surprises.

“Know your needs in advance,” Christian says. “Don’t call your lender a week before you need something, because it’s just evidence that you’re not the greatest planner in the world.”

Christian says to also be upfront with your accountant and lender about both the good and bad in your business.

“A lot of owners aren’t engaged in communicating bad information to the lenders for fear of the unknown, but actually it increases your credibility with the lender,” Christian says.

In addition to planning, demonstrating control is critical for impressing lenders, according to Mike Dubin, Philadelphia office managing partner for McGladrey & Pullen LLP.

“The last thing a banker wants to see is that the stewards of the business — and that could be the president, owner, CFO or COO — don’t have control and don’t have understanding,” Dubin says. “The minute there is a suspicion that there is a lack of control or lack of understanding what’s going on or a lack of full knowledge to exactly what’s taking place in the business, that’s the first thing that will turn off the banker.”

Dubin suggests setting up Sarbanes-Oxley-type controls for your organization, even if you’re private. For example, having segregation of duties decreases the likelihood of fraud in the business, and lenders notice those things.

“What makes lenders feel good is making sure that the control environment works properly, and accountants certainly have the skill set to be able to help owners do that,” Dubin says.

Another way to increase your chances of getting funding approval is to have accurate, professional financial statements.

“What turns off a banker immediately is when there’s a company that has internal financial statements that appear to be not professionally produced or appear to not be correct or may not be complete,” Dubin says.

This is where a reputable accounting firm can help you look more attractive to lenders.

“Dealing with the right accounting firm adds credibility to the financial statements and to ‘the ask’ — whatever it is you’re asking for,” Christian says. “It’s incredibly important to engage a reputable, well-respected accounting firm because they can assist in better terms, better conditions, and it adds credibility.”

Donny Woods, president of the National Society of Accountants, agrees but says, like with approaching lenders, to give your accountant a few weeks’ notice to prepare financial statements.

“You can’t just walk in and say, ‘We need these financial statements tomorrow,’” he says. “We have clients who will do that and think all we have to do is push a button and print report, and it’s just not quite that easy. … When you are doing financial statements, you don’t need to be rushed. You need to be able to have time to consult with the client to make sure that the information you are including is correct and there’s some analysis that has to be done, and it can be time consuming.”

Beyond these things, your history is important when it comes to getting financing, as well.

“They need to watch their cash flow and make sure they pay their bills on time,” Woods says. “They need to have a good payment track record. Those are the things that lending institutions are looking at.”

Scott says you also have to demonstrate the strength of your customers to lenders if you want to get financing.

“You have to have strong customers to have a strong business,” she says. “You could sell product all day long, but if your customers that are buying the product are not in a good position, you’re not going to collect your money.”

How to reach: American Institute of Certified Public Accountants, (888) 777-7077 or www.aicpa.org; Kreischer Miller, (215) 441-4600 or www.kmco.com; McGladrey & Pullen LLP, (215) 641-8600 or www.mcgladrey.com; National Society of Accountants, (800) 966-6679 or www.nsacct.org

How to make your business attractive for financing

As the world slowly moves out of the great recession, banks are starting to lend more, but they’re still cautious. The best way to ensure the financing your business needs is to work with your accountant to make your organization more attractive to lenders, which starts with good business planning.

“All organizations should have a business plan — their road map of what they’re going to be doing in the future, especially a new business or an immature business,” says Carol Scott, vice president of business, industry and government for the American Institute of Certified Public Accountants.

Having a plan is critical to convincing someone to loan you money, whether it’s a bank or a venture capitalist.

“If you’re looking for financing, you have to make the business case that, ‘I have a good plan for running this business, and I have a good plan for repaying you,’” Scott says.

Lenders don’t like surprises, so know your needs in advance. Don’t contact your lender a week before you need something, because it will be evident that you are not the greatest planner, making you less attractive to the bank.

You need to be upfront with your accountant and lender about both the good and bad in your business. Being honest about bad information can actually increase your credibility with the lender.

In addition to planning, demonstrating control is critical for impressing banks. The last thing a banker wants to see is that the president, COO or other top executive doesn’t have control and doesn’t have an understanding of the business. The minute there is a suspicion that there is a lack of full knowledge to exactly what’s taking place in the business, the banker will be much less likely to work a financing deal with your company.

One way to reassure a banker is to set up a Sarbanes-Oxley-type control for your organization, even if you’re private. For example, having segregation of duties decreases the likelihood of fraud in the business, and lenders notice those things. Your accountant can help you set up a control environment that is appropriate for your business and attractive to your banker.

Another way to increase your chances of getting funding approval is to have accurate, professional financial statements.

Bankers dislike internal financial statements that appear to be not professionally produced or appear to not be correct or are incomplete.

This is where a reputable accounting firm can help you look more attractive to lenders.

Dealing with the right accounting firm adds credibility to the financial statements and to ‘the ask’ — whatever it is you’re asking for. It’s incredibly important to engage a reputable, well-respected accounting firm because they can assist in getting better terms for your loan, and working with a respected firm adds credibility to your request.

Donny Woods, president of the National Society of Accountants, says, like with approaching lenders, to give your accountant a few weeks’ notice to prepare financial statements.

“You can’t just walk in and say, ‘We need these financial statements tomorrow,’” he says. “We have clients who will do that and think all we have to do is push a button and print report, and it’s just not quite that easy. … When you are doing financial statements, you don’t need to be rushed. You need to be able to have time to consult with the client to make sure that the information you are including is correct and there’s some analysis that has to be done, and it can be time consuming.”

Beyond these things, your history is important when it comes to getting financing, as well.

“They need to watch their cash flow and make sure they pay their bills on time,” Woods says. “They need to have a good payment track record. Those are the things that lending institutions are looking at.”

Scott says you also have to demonstrate the strength of your customers to lenders if you want to get financing.

“You have to have strong customers to have a strong business,” she says. “You could sell product all day long, but if your customers that are buying the product are not in a good position, you’re not going to collect your money.”

How to reach: American Institute of Certified Public Accountants, (888) 777-7077 or www.aicpa.org; National Society of Accountants, (800) 966-6679 or www.nsacct.org