Imagine being able to outfit your growing business with a new computer network and furniture without going to your bank for financing. Better yet, imagine getting your lease approval within a few hours and the lease closing within a couple of weeks. You have just imagined the benefits of a small-ticket lease.
During 2007, small-ticket leasing was a multi-billion dollar industry in the U.S. Many equipment vendors or their financing partners offer this form of financing at the point of equipment sale to make equipment purchases more convenient. Customers like this form of financing because approvals are usually given within a few hours to a couple of days. Not only is it a convenient way for businesses to acquire equipment costing less than $ 100,000, customers are often able to conserve their bank credit lines for other uses.
Leasing and financing companies like small-ticket leases because they are easy to originate, approve and process. They lend themselves to credit scoring and make diversifying lease portfolios easier. Also, small-ticket leases are in high demand.
Generally, small-ticket leases are designed for equipment totaling less than $100,000. At some larger vendors 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 the personal guarantees of the business owners/principals. Most are written on the basis of applications submitted by prospective customers. These applications are then processed by the leasing companies using credit scoring models.
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 are generally from 36 to 72 months and most lease payments are due monthly.
Small-ticket lease contracts often comprise only one or two pages. One drawback to this type of financing is that most leasing companies and vendors do not entertain lease negotiations or changes in the contract. Because this is usually a high-volume, relatively low-margin business, it is generally not cost-efficient for them to spend time negotiating the transaction.
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 and Company, a credit-scoring service. Using statistics, they determined that the personal credit behavior of a company’s key principals/owners is a strong predictor of their business credit behavior. Simply stated, a business owner who pays personal bills on time generally will cause his/her company to pay bills on time.
While most large leasing companies use credit-scoring models for small-ticket leases, well over 90% of these transactions are credit-scored when below $ 50,000. Many systems use up to 20 factors to evaluate credit worthiness, with the overriding factor being the credit history of the business owners and key principals.
Other business-related factors used to score these transactions include:
1) the company’s time in business;
2) company’s size;
3) the industry;
4) the form of company organization;
5) the history of paying bills on time;
6) the business’ net worth;
7) the average bank balances;
8) the ratio of debt service to cash flow; and
9) any recent judgments, bankruptcies or agency collections.
Some small-ticket leasing companies have special pools for higher-risk customers. They generally charge these customers higher lease rates and sometimes offer them lease terms that are less attractive. Other leasing companies ask for credit enhancements such as additional collateral or outside guarantees.
There are several ways that companies can improve their chances of qualifying for small-ticket leases. Most involve improving the payment patterns of the companies and their principals. Here are a few specific steps that business owners can take:
* Pay all back taxes
* Settle outstanding liens and judgments
* Pay bills on time and be consistent with payments
* Eliminate supplier disputes by settling with 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 vendors who report activity to the major credit bureaus
* Set up automatic account debiting with the leasing company to help eliminate the possibility of paying slow
Small-ticket leases represent a very useful form of financing for small businesses. These transactions are speedy and convenient. Many equipment vendors either offer this form of financing themselves or through small-ticket leasing partners. Take advantage of this convenient form of financing to quickly acquire needed equipment and to move your company ahead.
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