Entrepreneurs and managers want to compare equipment finance companies to their bank and for good reason A bank is a companys first reference point when borrowing money or financing equipment or expansion project. A bank is the most obvious place to start and a safe place to store your money and use its multiple services. But what a bank does not do well both historically because of its structure and the recent tightening of the credit market is to offer corporate finance for capital assets equipment. But many people get confused when looking for a lending because they do not see the whole picture. This is a case where you definitely want to compare apples with apples for the best results.
Here are some points to compare. These are not determined in stone but based on years of experience these trends apply a majority of time.
1 Total Dollars Funded. Banks usually require a balance of 20% or 30% of the lending amount on deposit. This means that they only fund 70% or 80% of your equipment costs as you have to keep a certain amount of your money on a fixed account during the loan period. On the other hand a finance company will cover 100% of the equipment including all soft costs and will only request one or two months advance payment. No fixed deposits required.
2 Soft costs. Banks usually do not cover soft costs such as labor guarantees advice and installation which means that these costs are out of pocket. A equipment finance company covers 100% of the equipment price including soft costs and some projects can be funded with 100% soft costs that no bank ever would consider.
3 Interest rates. this is the most popular issue in the financial world; what is my course? If the bank requires 30% deposit in a fixed account it automatically raises a 5% interest rate to 20%. Now people will argue that you will get the deposited money back at the end of the term but its money that you do not have access to and have an opportunity cost associated with it. Equipment finance companies target their financing rates between .5% for cities and 9% for commercial financing which is a real fixed interest rate and not undervalued because bank rates can be so independent. The finance companys interest rates are very competitive with true bank interest rates.
4 Process Speed. Banks often take weeks to review and approve a financial request while indebted financial companies usually only take a few days and can work a lot faster. Financial guarantees only review business financing while a bank has other types of requests that block its channel.
Banks also have many more levels of approval and review to pass while independent finance companies usually only have two insurance and credit commissions. Even with complicated agreements the finance companys process is always faster.
5 Guarantee. As a standard part of their documentation banks require a form of all assets both personal and commercial assets are used as a guarantee against default on the loan. The assets of your company your home your car and your boat can all be on the line when you enter a bank transaction. This may also be the case with a finance company but if your business is solvents only your company will be listed as collateral and not your personal assets. This is known as a corp only approval.
6 Monitoring. Banks require annual reclassification of all their business accounts which means that the anniversary of your loan annually you must submit the required financial documents to insure the bank that everything is going well and nothing has negatively affected your business. Financial companies do not need anything during the loan period or financing as long as the monthly payments are made on time. No one will check your business or police what you do.
When comparing your bank financing to an independent finance company make sure that you evaluate all key parameters not just one. Certainly fine print and terms of transaction are more important than the big numbers. The banks are working well in their space but have been shown over and over to not be as flexible or solutio.oriented as an independent finance company that focuses exclusively on corporate lending.