Nick Lionello of Beacon Funding discusses the benefits, as well as the risks, of offering flexible financing solutions and how it can lead to new business.
From seasonal to start-up, many businesses don’t fit into the traditional lending structures imposed by most financing companies. When a business needs flexible financing options to purchase equipment, they are often left with few choices. Many lenders see flexible financing as too big of a risk, but sometimes, a little risk yields high reward. With a small leap of faith, companies can break into a largely untapped market. More clients and bigger budgets await companies that take the plunge. Before offering flexible equipment financing programs, consider the benefits and note the risks. You may find that the pros outweigh the cons quite a bit.
Benefit: Appeal to Start-Ups
It’s the age of the start-up. Each month, 330 out of every 100,000 adults in the U.S. become entrepreneurs . Chances are high that these entrepreneurs aren’t independently wealthy. They need financing to get started, especially when it comes to high-cost equipment. Business owners end up applying for financing only to be turned down. Their dreams become unreachable because they lack a long credit history. Some potential business owners turn to crowdfunding (Kickstarter, Go Fund Me, etc.), while others fail before even getting off the ground. Either way, equipment financing companies are missing out on a wealth of clients.
Breaking into this ill-served market only requires a bit of flexibility on an equipment financing company’s side. The first step in catering to start-ups calls for a change in credit requirements. Businesses that haven’t been in operation for two years don’t have the credit history to meet the strict standards many financing companies adhere to. By eliminating the immediate rejection of subpar credit, equipment financing companies begin to see an increase in leads. In addition to smudging the credit standard line, offering deferred, skip and step payment plans attracts new businesses.
The major benefit of taking on start-ups and flexible financing programs is the potential they bring. Getting in at the start of a business can pay off ten-fold, if the company does well. Most likely, the business will choose to stay with the equipment financing company that gave them a chance in the beginning.
Risk: Chance of Failure
When working with businesses that require flexible financing, the risk tends to be higher. With start-ups, the risk stems from the higher chance of failure. New businesses aren’t exactly known for stability. The financial ups and downs of a start-up can also put a strain on the equipment financing company. Inconsistent payments and possible closure make start-ups a hard client to handle. Waiting it out for the first few months/years does not always guarantee a return on investment and watching a business with financed equipment fail can be a hard pill to swallow. Equipment financing companies need to be ready to handle any potential challenges before working with start-ups.
Benefit: Set Yourself Apart
When a company offers flexible financing programs, it gains a competitive edge in the industry. Businesses that require a nontraditional lease have fewer companies to choose from. Flexible financing opens the doors to seasonal businesses, quickly growing businesses, start-ups and even established businesses that happen to have unorthodox needs. These businesses can’t work with traditional payment plans and are forced to pick from the small set of equipment financing companies that are flexible and accommodating.
The potential marketing campaigns centered on flexible financing also give companies a chance to stand out. While other companies stick to the traditional lending options, flexible companies can branch out and promote unique programs.
Risk: Cash Flow Fluctuation
With deferred, skip and step payment comes a fluctuation in cash flow. When offering deferred payment, an equipment financing company must be ready to earn less initially. The gap between the start of the lease and the first payment can put strain on a company’s funds. Skip and step payments require more planning and budgeting throughout the lease. Unprepared financing companies will find themselves cash strapped during a skip lease’s lower payment period. Luckily, careful planning and budgeting help make these programs feasible.
Benefit: Approve More, Make More
Leaving the old financing model behind makes room for more approvals. Potential deals won’t be immediately rejected based on credit and the financing companies are left with a higher potential for profit. Also, the reputation for being a company that approves more than it rejects will bring in more business.
When Dave Sandel of Sandel Cranes went looking for financing, he was met with tough credit requirements and inflexible financing companies unwilling to work out terms to benefit both parties. Eventually, Sandel encountered Beacon Funding, an equipment financing company with knowledge of commercial trucks. Beacon offered flexible financing programs that catered to Sandel’s needs and allowed him to get the equipment he needed. His credit was no longer an issue and he received longer lease terms that helped him to maintain positive cash flow while his business expanded. Beacon also deferred his first payment when issues with the seller arose. Without the flexibility Beacon provided, Sandel wouldn’t have been able to take on bigger jobs and increase revenue. By stepping in with flexible financing options, Beacon Funding secured the deal and generated profit.
Weighing the Odds
After considering the pros and cons, it’s time to calculate risk vs. reward. For some companies, maybe even most, the benefits beat out the risks. The increase in start-ups, crowdfunding and competition amongst lenders means customers expect competitive terms and flexible payment options. An increase in overall business and more deals approved is hard to resist. Now may be the time to start implementing flexible programs. After all, it’s better to be ahead of the curve than behind it.
Successfully assessing equipment values in today’s marketplace is a multi-faceted responsibility that falls on the shoulders of the asset management team. Already faced with the diminishing balance between risk and reward, asset managers work in a world where new regulatory... read more
Active members of the equipment leasing and finance industry are often familiar with the super-priority rule contained in Article 9 of the UCC. Under certain circumstances, this rule allows a party that takes possession of chattel paper in connection with... read more