Reality Check: Your Bank and Business Finance

Managers and business owners want to compare equipment financing companies with their bank. This is because a bank is the first place a company turns when they need to borrow money, finance equipment, or expand their business. Banks are the best place to start, as they offer a safe place to deposit your money and allow you to use their many services. A bank’s inability to provide business financing for capital assets (equipment) is due to their historical structure and recent tightening credit markets. Many people are confused when they look for equipment loans. This is because they don’t see the whole picture.

These are just a few things to consider. While they aren’t set in stone, they are based on many years of experience and are generally applicable.

1) Total Dollars Financed – Banks usually require you to keep a deposit of 20% or 30% of your equipment loan amount. Because they only finance 70% to 80% of your equipment costs, banks require that you keep a set amount of YOUR money in fixed accounts for the duration of the loan. An equipment finance company, on the other hand, will pay 100% of your equipment costs including any “soft” expenses and only require a one- or two-month prepayment. No fixed deposits required.

2) Soft costs – Banks will not normally cover “soft” expenses like consulting, labor, warrantees and installation. This means that these costs are out of your budget. A equipment finance company will pay 100% of the equipment’s price, including any “soft” expenses. Some projects can also be funded with 100% “soft”, which is something that no bank would consider.

3) Interest Rates- This is the most common question in finance. What’s my rate? A bank that requires 30% deposit to a fixed account automatically raises the interest rate by 5% to 20%. People will argue that the deposited money is returned at the end of the term, but that money is not yours and it has an opportunity cost. Equipment finance companies aim to set their financing rates at between 3-5% in cities and 7-9% in commercial financing. This is a fixed rate that can’t be understated. Independent finance company rates can also be very competitive with true bank rates.

4) Speed of the process – Banks can take weeks to approve and review a finance request, while independent finance companies usually only take a few days. They can also work faster. When a bank has multiple types of requests, finance underwriters will only review business financing.

Banks have more approval levels and reviews to pass, while independent finance companies typically only have two: underwriting and credit committee. The process of financing companies is faster even for complex deals.

5) Guarantee – Banks require a blanket lien on all assets as part of their documentation. This is used to guarantee against default on the loan. When you enter into a bank transaction, your business assets, home, car, and boat could all be at risk. An equipment financing company may have this same situation. However, if your business is solvent, your business will only be listed as collateral. This approval is also known as a “corponly” approval.

6) Monitoring – Banks require annual “re-qualification” of all business accounts. This means that each year on the anniversary of your loan, you will need to submit required financial documents to show the bank that your business is in good standing and that there have been no adverse effects. As long as your monthly payments are on time, finance companies don’t require any documentation during the loan term. Nobody will ever be looking into your business or monitoring what you do.

You need to evaluate all aspects of your bank financing, not just one, when comparing it to independent equipment finance companies. The fine print and terms of a transaction are far more important than the big numbers. While banks are good at their job, they have repeatedly proven to be less flexible and solution-oriented than independent finance companies that primarily focus on business lending.