A Finance Approval Can Be a Moving Target

Financing equipment in all markets is always a slightly moving target. Hard credit rules are constantly changing because underwriters and credit teams are pressured to make the right decision; their jobs depend on it. The squeeze on one end for lenders is to minimize bad debt by avoiding financing clients which end up in default. On the other end, lenders and investors need to make a profit and federal regulations require they approve a certain number of loans. The scenario is frustrating for both the customer and finance agent but we can confirm that investors are still lending and approvals are much higher than last year.

What are some common approval guidelines?

Complete financial disclosure is best for getting a quick decision. Knowing what your credit, assets, liabilities look like and how your company is performing will provide the underwriter a complete picture thus allowing them to offer the best terms possible. Hiding bad debt almost always comes out and simply delays or terminates the evaluation process so put all your cards on the table. Explain specific losses or why certain bills went unpaid.

Check your own credit score or Dun & Bradstreet report; if something negative pops up then work to correct or repair it before you fill out an application; There are many agencies which help correct or fix credit quickly. Rectify the issue and have proof that it has been cleared; this step will show the underwriter that your credit is being managed properly.

If you're a smaller business, be prepared to PG (personally guarantee) your finance. It's a blanket guarantee with your assets as a pledge that you will make your payments. If you don't, then like any creditor, they will leverage or take your assets to repay the debt. Years ago, small businesses were not regularly asked to PG but now, they are. Lenders feel if you don't "believe" in your business and prepared to stand behind it, then why should they. Side note; often high net worth individuals with poor cash flow feel they should get approved based on how much they are worth. This is often not the case, lenders are not in the business of filing lawsuits and chasing after assets for repayment which often results in a loss to them anyways. They want to lend to businesses which have a high probably of paying them back through their normal business operations.

Finally, write a brief summary of yourself, your business and why the finance request will benefit your company. Whether you are the vendor or the borrower, putting a human touch to the finance application goes a lot further than many people realize. Describe length of time in business, who the owners are with brief background, what products you sell and areas or markets you serve and describe the opportunities. It's how you would describe the business in a two minute introduction to a stranger.

This market requires awareness and flexibility on both sides of the transaction; it's not what lending …

The Target Capital Structure

Firms can choose whatever mix of debt and equity they desire to finance their assets, subject to the willingness of investors to provide such funds. And, as we shall see, there exist many different mixes of debt and equity, or capital structures – in some firms, such as Chrysler Corporation, debt accounts for more than 70 percent of the financing, while other firms, such as Microsoft, have little or no debt.

In the next few sections, we discuss factors that affect a firm's capital structure, and we conclude a firm should attempt to determine what its optimal, or best, mix of financing should be. But, you will find that determining the exact optimal capital structure is not a science, so after analyzing a number of factors, a firm establishes a target capital structure it believes is optimal, which is then used as a guide for raising funds in the future . This target might change over time as conditions vary, but at any given moment the firm's management has a specific capital structure in mind, and individual financing decisions should be consistent with this target. If the actual proportion of debt is below the target level, new funds will probably be raised by issuing debt, whereas if the proportion of debt is above the target, stock will probably be sold to bring the firm back in line with the target debt / assets ratio.

Capital structure policy involves a trade-off between risk and return. Using more debt raises the riskiness of the firm's earnings stream, but a higher propor-cription of debt generally leads to a higher expected rate of return; and, we know that the higher risk associated with greater debt tends to lower the stock's price. At the same time, however, the higher expected rate of return makes the stock more attractive to investors, which, in turn, ultimately increases the stock's price. Therefore, the optimal capital structure is the one that strikes a balance between risk and return to achieve our ultimate goal of maximizing the price of the stock.

Four primary factors influence capital structure decisions:

1. The first is the firm's business risk, or the riskiness that would be inherent in the firm's operations if it used no debt. The greater the firm's business risk, the lower the amount of debt that is optimal.

2. The second key factor is the firm's tax position. A major reason for using debt is that interest is tax deductible, which lowers the effective cost of debt. However, if much of a firm's income is already sheltered from taxes by accelerated depreciation or tax loss carryforwards, its tax rate will be low, and debt will not be as advantageous as it would be to a firm with a higher effective tax rate.

3. The third important consideration is financial flexibility, or the ability to raise capital on reasonable terms under adverse conditions. Corporate treasurers know that a steady supply of capital is necessary for stable operations, which, in turn, are vital …