Steve Geller began his career as a national bank examiner for the OCC division of the U.S. Treasury, before becoming a bank officer and transitioning into the equipment finance industry in the 1970’s as a marketing representative for several leasing companies. He founded and has been operating his own business, Leasing Solutions LLC, since 2001, representing a select number of brokers and assisting in the funding of transactions. He has served as an officer, conference chair, and board members of the Eastern Association of Equipment Lessors, as a founding trustee and member of the board of the CLFP Foundation,and as a participant at ELFA.
Relationships are the cornerstone of any business transaction, and broker/lender interactions are no different. Steve Geller outlines some of the basic due diligence and research brokers can perform to ensure their lender relationships are successful and long-lasting for both them and any potential borrowers.
After participating in the banking and finance industry for all of my career and spending over thirty years specifically in the equipment leasing and finance industry as a credit analyst, lending officer, and broker division manager, I have developed an in-depth understanding of what is needed to make sure a broker gets the respect of his lenders, as well as get more deals done.
To get your deals approved, you need to cover all contingencies and find more than one way for your lender to recover its investment in the event of default and loss of value in the financed asset. This requires a common-sense approach to financial analysis and a diligent review of the strengths, weaknesses, ownership, and needs of the applicant.
APPRAISING THE DEAL
In every submission, it is imperative that the broker answer most questions that could possibly come up in the credit review. A lender’s deal review that reveals unanswered questions or obvious weaknesses are easy declines. Analysts who see a regular stream of business from brokers form opinions about that broker’s ability to analyze credit and submit sound deals. Consciously or subconsciously, a lender can easily turn down a transaction based on a preconceived prejudice. It is best to make sure that your lenders believe your deals have been properly pre-screened and warrant further review. The old adage that if you throw enough against the wall, some of it will stick is a poor approach. Each deal that “doesn’t stick” means a diminution of the analyst’s opinion of the deal submitter.
How does the broker ensure that she is held in the lender’s highest regard? A common sense approach must be undertaken. How did the deal come to the broker? Was it via cold call, vendor referral, or other means? If the vendor “found” the broker, how did that happen? What other brokers have looked at the same deal, and why are they not doing it?
The vendor of the transaction should also be reviewed. This is especially vital if a vendor is from a different region of the country and has “found” the broker notwithstanding the expansion of the internet. How long have they been in business, and what sort of analysis do they use on the suitability of the equipment for the applicant?
These seemingly peripheral issues are vital elements that the lender must take into consideration when appraising a deal. If a broker has a relationship with the vendor, the history of that relationship should be explained to the lender as part of the credit submittal.
When looking at a deal, think about whether the equipment acquisition is mission critical versus an expansion into an entirely new aspect of the business that could experience financial difficulties and cause the borrower to seek any kind of lifesaver. If that’s the case, this should be eliminated as a part of the transaction review.
A smooth vendor salesperson can push an equipment sale by overselling the ability of the product to produce a profitable return for the borrower. If that happens, the buyer can be forced to concentrate on that new phase of the business and possibly overfund it to the detriment of the company’s main business focus. For that reason, it is best to only consider looking at deals for equipment in the applicant’s core business unless a strong case can be made for the equipment acquisition. A broker can in that way become a trusted advisor to a small business by pointing out what might be a poor investment. Helping out an applicant can also lead to a solidified longterm relationship.
The broker should look to the history of the business and have a full understanding of what the equipment acquisition will do for it and whether it is a vital addition or not. When was the business founded? Are the current principals the same ones who founded the company? Have some principals dropped off? Has a partnership dissolved? What were the reasons for the change in ownership and/or business focus? A discussion with the principals should reveal all of this. It also assists the broker in judging the applicant’s knowledge of the business and his ability to run the business professionally and in a sound fashion.
A source of public information about the applicant may be found at the SOS website for the state in which the company is incorporated. Some states have certificates of incorporation on their website, copies of which are available free or for a nominal amount. For instance, I use the State of New Jersey’s website which charges $.10 per page and produces a wealth of useful information. The State of Florida routinely lists certificates of incorporation and annual reports, both of which are interesting to review and reveal the articles of incorporation, who the original shareholders were, the dates of changes in ownership, and any changes in management reflected in the annual reports on file with the state.
Research can additionally provide a better understanding of a company. Is a newly incorporated business actually the continuation of a business that used to be an unincorporated proprietorship or partnership? If it’s a completely new company, what did the principals do prior to opening their business? Were they in the same line of work? Is the business, now incorporated, the continuation of a prior business that may have been a sole proprietorship, partnership or other unincorporated entity?
The willing applicant can easily provide documentation with all of this detail, and the information should be part of the broker’s presentation to the lender.
HOW TO ADDRESS PROBLEM AREAS
What are the negatives in a transaction? What are the issues that may not be seen or uncovered by a lender? All transactions have them, and lenders are astute in their ability to ferret out those issues. Nothing is more embarrassing for a broker than to receive a call from a lender asking about an issue that was well known and not addressed up front.
In the very first sentence or paragraph of a write-up, whatever the size of the transaction, any negatives should be revealed, along with the reasoning of why the deal still makes sense and what the applicant has done to overcome said negatives. These negatives might be delinquent issues on a credit report or a line of credit that has matured and may be a drag on the company if not paid off or refinanced. Perhaps the equipment acquisition appears as a duplication of other owned equipment. Why is it being acquired? Is it for expansion or to replace older equipment? Is there a buyer for the older equipment or is the vendor assisting the buyer in selling the older piece, if not taking it as a trade-in?
As a trusted advisor, the broker should discuss any negatives found on the credit report and have the applicant or its professional advisors contact the credit agencies to have any potential misreported information removed from the report. A credit report on a transaction with which I was once involved was declined due to a significant delinquency on a time share obligation. When we questioned the applicant about this issue, he indicated that the liability was transferred in a divorce proceeding, and we were provided a copy of the divorce decree clearly showing this. When we notified our lender about it, the decline was reversed. We recommended that the applicant or his attorney contact the credit reporting agencies and get that on record.
If at least some of these suggestions start to be followed and more coherent packages are sent to funders, the brokers who do these small things will start to differentiate themselves from others. This will reflect, in the lender’s eyes, brokers who are willing to seek to understand deals and become more worthy of the lender’s time and confidence, which leads to increased approvals, fundings, and commissions. •
The equipment finance industry has come a long way on digital transformation in the past decade. As we enter a new one, the next frontier will be completing the digital journey to encompass all points in the leasing life cycle.... read more
Have good economic times led to an over production of equipment with negative value implications? If the economy declines, will residual values follow? Is there a growing residual value risk? This article will present several examples of residual value risk... read more