As a business, if the bank says NO where do you go?

When it comes to purchasing equipment for a start-up or existing business, a number of people will approach their bank for funding. However, not everyone is successful in this process and here are some of the potential reasons why:

If you are a newly incorporated business:

1. Director background

Some banks may not entertain new start businesses due to the background of the directors which unfortunately has a significant impact of the ability of the business to move forward. Alternative finance providers, such as specific equipment leasing funders will often look beyond a business plan and an individual’s previous experiences as they have a strong desire to help new businesses and a sound knowledge of the different equipment types available.

See also: Business startup advice – Should I go to the bank first?

2. Sector risks

There are some industry sectors that are riskier than others and often have a higher ‘fall-rate’ which for principle funders does not always sit comfortably. Banks will generally analyse the risk element of a request for finance more than an equipment funder and will often provide preferential pricing depending on the risk factor.

Equipment funders on the other hand, are more likely to provide pricing which suits the customer, the industry and the asset.

3. Soft vs hard assets

There are two types of assets often referred to in business; soft and hard assets.

Soft assets relate to equipment which doesn’t have an end of term residual value, such as photocopiers, IT and office furniture.

Whereas, hard assets relate to more critical equipment needed for a business to operate, such as waste compactors, or forklift trucks would be key for a manufacturing business. Hard assets are those that would retain their value at the end of their life.

See also: Finance options for farm and rural start-ups and expanding businesses

Traditionally a bank will look more favourably at harder assets because they know that if a business fails, they would have some sort of monetary return from a future sale in the event of a default payment. However, for a number of start-up businesses, hard assets will not have yet been purchased and this is where alternative finance options can come into their own.

If you are a growing business:

1. Advancing further funds

When sourcing finance through a bank you will undoubtedly be limited by your banks' credit criteria which has positive and negative connotations depending on how you look at it. Leasing, on the other hand, is an alternative funding option that allows the customer the benefit of not putting all their eggs in one basket and can prevent customers being drawn into agreements which could have limiting effects.

2. Asset insecurity

Banks will prefer to underwrite harder assets, whereas leasing financiers will often take a more open approach to funding softer assets. With growing businesses at risk of not having sufficient hard assets this is where banks will not look favourably and alternative finance can become an option.

So, in summary, what are the pros and cons of gaining finance from a bank or a leasing company when it comes to purchasing equipment?

Share