After 25 years of funding equipment for clients, one thing is clear – the client has already approved the finance in their own mind, they know why they are buying it, what it will earn or save them and the risks involved.
After all if it goes wrong think about the outcome:
For the bank employee, it is a mark against their name as the loan has defaulted.
For the client, it’s their personal guarantee on the line and an obligation to make good even if it means selling assets to clear the debt.
Good finance is not about jumping through hoops for the bank, it is absolutely about understanding why the client has decided to buy and putting that decision and the reasons why into “bank speak”.
So it all comes down to 3 things:
1) can you afford the payments?
2) if it all goes pear shaped can you sell the gear and pay out the debt?
3) have you always honoured your commitments (historic finance report card)?
Whether the asset cost is $20,000, $200,000 or $2mil, these 3 fundamentals apply.
Yes there is more detail to go into on each aspect the larger the asset cost, however it is these 3 fundamentals that are the primary issues to address.
If we are arranging a $1mil transaction we will address 20 individual areas however these are really a subset of the 3 fundamentals.
As an example, under “can they afford to pay” comes the subset of is there any significant risk to their income?
Being too exposed to 1 single client or industry may pose a risk so a summary looking at spread of clients and industries will address that, usually any single exposure to a client of greater than 20% would be looked at and explained, however there are examples where a company may have a 5 year written contract with the Government so this risk is seen as acceptable.
Similarly, income may be seen to be affected if the Managing Director falls off his twig, so comments around key man policies, succession planning and the existing management structure is looked at. In essence can the business continue if the MD is out of play?
On the asset exposure side, if a $1mil machine is seen to have a $700,000 auction value, are there other items of equipment that could be sold to cover any shortfall or does the owner have a strong level of personal assets which could be used to finance any shortfall on the debt? These questions simply address “if it all goes pear shaped can you sell the gear and pay out the debt?”
These are just a couple of examples to show that “Finance ain’t Rocket Science”, just a bit more content where the asset cost is greater. Any savvy company owner has already addressed all of these in their own mind as a function of contemplating the purchase of the equipment.