The last four years in the finance business have been the most challenging in my career. Not only did our stock markets make a major correction, but so did the financial markets.
I was attending a round table meeting with one of our banks recently in Las Vegas, when an old friend and colleague sitting next to me pulled out a list of banks we used to buy our money from in the '90s. The list contained about 14 names. Of those 14 banks, only eight were still in business. Since 2000, many lenders have gone out of business because of poor portfolio performance. Unwise business practices, credit windows that may have let too many poor credits through and dropping interest rates were the demise of many a lender.
When the economy slowed, the default rates went up as cash flow dried up. At the same time the feds lowered interest rates, reducing return on investment. This dominoed into many different problems. First, it put many lenders out of business. Shrinking profits, combined with rising defaults were more than many lenders could handle. With lower return on investment, the lender is not willing to take any risk. He simply can't afford defaults and losses. As a result credit tightens and investors are looking for only “A” credits.
This gets us to the old saying, “Money is cheap, but they don't want to lend it to you unless you don't need it.” As a result we have had trouble approving some clients who had borrowed money from us for years. The scorecards tightened, and the number of buyers for this paper shrank.
But now we have good news: This is all changing once again as the market completes its correction.
In 2000 it was difficult for a company such as ours to find abundant cheap money. All the lenders were downsizing or simply closing their doors. The good lenders were not looking to expand the number of brokers they work with. Their credit windows tightened as they tried to reduce risk. You were lucky if a new lender would even return your call. Since the beginning of 2004 this is all changing. Lenders are coming out of the woodwork. We now receive a couple of calls a week from new lenders entering the market and from existing lenders wanting to expand.
This is good news for the consumer. They will have many more choices in borrowing than they did just six months ago. It is also great for companies like ClearView and other lenders to the rental industry who will have more programs to offer our clients.
Even though ClearView Financial specializes in the rental business, we have many other divisions. Our Jacksonville, Fla., office specializes in machine tooling and manufacturing; our Hockessin, Del., office in trucking; our Wenatchee, Wash., office in local agriculture, trucking, rental, waste management, and general business; and the home office in Ephrata, Wash., in a combination of all the above. The diversity keeps the company healthy and as a side benefit, keeps tabs on the general economy in America.
Probably the most exciting news is that manufacturing in the United States is regaining its footing. Purchases of machine tooling and manufacturing equipment are rising quickly. At a recent trade show in Los Angeles vendors were extremely excited. I was told they had not seen a buying show like that since the '90s. The recent rental show in Atlanta had the same results. As the general economy picks up speed, so does the rental industry.
As this occurs we are very happy to see many rental centers finally replacing worn out inventory that probably should have been replaced a year or two ago. Confidence in the economic recovery will only spur more buying. This is great news for those of us who make a living in this industry. Companies such as mine, manufacturers and manufacturer's reps are all looking forward to the next couple of years as the economic recovery continues.
What does all this mean to rental companies? Under the current lending conditions there are some factors that will help rental companies get the credit they need. First you must understand what the lender is looking at. They will be keying in on a couple of issues to qualify you.
First there are two basic classes of leases or loans: application only, and full disclosure.
Most of our transactions are application only. We do this for a number of reasons. First we find clients who have good credit, but their financials are weak. We will then lend them money based on their good credit rather than their financial strength. We can put together leases or loans up to $75,000 or $100,000 maximum under this program. When working with an application only loan, here are the things we look at:
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Personal Credit: If you have a closely held company (four or fewer owners) your personal credit is very important. I have been asked many times, “Why is my personal credit important? This is a business loan.” The reason is that we view the company and yourself as the same. If you are having personal credit problems, your company may soon reflect a similar pattern. Personal credit can be managed by paying your personal bills on time to companies that report to the credit bureaus. Do not max out your credit cards, always try to keep 50 percent of the credit line unused. If you need more credit you are better off to open a new account than to max your current cards.
Also keep your inquires to a minimum. Every time you fill out a credit application you have given permission to have your credit report pulled. Every time your credit is pulled it leaves an inquiry on the bureau. You should try to keep this down to 10 or fewer per year. Choose a company to work with and send them your application. Do not send out 10 applications and wait for the best deal.
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Bank rating: We will get a bank rating from your business checking account.
We would like to see an average of $1,500 for small deals like $10,000; $5,000 for $25,000 requests; and about $10,000 for more than $50,000 in credit. These are just guidelines, but it is to your advantage to keep a higher balance in that account. If you have another money market account the business uses, let us know that and we will combine the average balances. The lenders are also very sensitive about NSF (bounced checks) activity. If something happens and your checks are returned, be sure to document it and have a story.
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Dunn & Bradstreet: If you do not have a D&B rating there are other business reports available. Pay your bills on time.
When we use full discloser lending, we get a financial package including tax returns and financial statements. We still use the info above, but we now have your net worth and cash flows to consider. This is required on most transactions of more than $75,000. We all want to pay as little taxes as possible. To do this we will try to show as little profit as possible. Just remember that this could impede your ability to borrow money. The lenders like to see a positive cash flow and a positive equity position.
Mike Arness is CEO of Clearview Financial Inc., Ephrata, Wash., www.clearviewfinancial.com.
