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Move Your Company Ahead with a Small-Ticket Equipment Lease
Imagine being able to finance your growing business with a new computer network and furniture without going to your bank. Better yet, imagine getting your lease approved in a matter of hours and closing the lease in two weeks. You can imagine the benefits of a short-ticket lease.
During 2007, short-ticket leasing was a multi-billion dollar industry in the U.S. Many equipment dealers or their financing partners offer this form of financing at the time of equipment sale to make equipment purchases more convenient. Consumers like this type of financing because approval is usually given in a matter of hours to a few days. Not only is it a convenient way for businesses to acquire equipment costing less than $100,000, consumers can often protect their bank credit lines for other uses.
Leasing and financing companies are similar to small-ticket leases because they are easy to originate, approve and process. They lend themselves to credit scoring and facilitate diversification of leases. Also, short-ticket fares are in high demand.
Generally, small-ticket leases are designed for equipment worth less than $100,000. At some of the larger sellers and leasing companies, the amount can be as high as $200,000. Most of these leases do not require company financial statements, but they often require a personal guarantee from the business owner/principal. Most are written based on applications submitted by potential customers. These applications are then processed by leasing companies using a credit scoring model.
Small-ticket lease transactions can be used for almost any type of equipment. Many transactions allow users to include some soft costs and/or software. Lease terms typically range from 36 to 72 months, and most lease payments are made monthly.
Small-ticket lease contracts are usually only one or two pages long. One drawback to this type of financing is that most leasing companies and sellers do not entertain lease negotiations or contract modifications. Because this is usually a high-volume, relatively low-margin business, it is usually not cost-effective for them to spend time negotiating the deal.
Credit scoring models have been used to help process small-ticket leases since the early 1990s. The original credit scoring models were developed in the 1980s by Fair Isaac & Company, a credit-scoring service. Using statistics, they determined that the personal credit behavior of company principals/owners is a strong predictor of their business credit behavior. Simply put, a business owner who pays personal bills on time motivates his/her company to pay bills on time.
While most major leasing companies use a credit-scoring model for small-ticket leases, more than 90% of these transactions are credit-scored when they are under $50,000. Many systems use up to 20 factors to evaluate creditworthiness, with the overriding factor being the credit history of the business owner and principal.
Other business-related factors used for these transactions include:
1) Company’s time in business;
2) size of the company;
4) Form of company organization;
5) history of paying bills on time;
6) net worth of the business;
7) average bank balance;
8) debt service cash flow ratio; And
9) Any recent judgments, bankruptcies or agency collections.
Some short-ticket rental companies have special pools for high-risk customers. They generally charge higher lease rates to these customers and sometimes offer less attractive lease terms. Other leasing companies ask for credit enhancements such as additional collateral or outside guarantees.
There are several ways companies can improve their chances of qualifying for short-ticket leases. Most companies and their principals involve reforming their payment methods. Here are some specific steps that business owners can take:
* Return all taxes
* Outstanding liens and judgments
* Pay bills on time and be consistent with payments
* Resolve supplier disputes by settling any suppliers or former employees
* Sell or factor accounts receivable to improve cash flow
* Register your firm with the Secretary of State where your business is incorporated
* Buy from sellers who report activity to the major credit bureaus
* Set up an automatic account debit with the leasing company to eliminate the possibility of late payments
Small-ticket leases represent a very useful form of financing for small businesses. These transactions are fast and convenient. Many equipment vendors provide this form of financing either for themselves or through small-ticket leasing partners. Take advantage of this convenient financing to get the equipment you need quickly and move your company forward.
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