Your Small Business Credit Underwriting Questions Answered – Part 1

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This is the first of a two-part post that answers your small business credit underwriting answers.  I recently caught up with Mike O’Connell, Direct Capital’s Credit Manager, to have him answer questions asked by our blog readers and Twitter followers.

Dave: What is your role on the Direct Capital team and how long have you been with the company?

Mike: I have been with Direct Capital for more than 10 years now. Initially I came on board as a credit analyst and over the years moved into the Credit Manager position. My main responsibilities include overseeing the credit department to ensure Direct Capital is giving every company that is looking for financing, the opportunity grow their business. I work with each of the underwriters to ensure financing transactions are put together in the best interests of the client and Direct Capital.

Dave: What are the main components you look at when underwriting an equipment financing transaction?

Mike: When underwriting an equipment lease; there are several key areas we review. Initially, we make sure the deal itself makes sense. Is an auto repair shop acquiring a new lift? That makes sense. Conversely, is a restaurant looking to acquire a new bulldozer? – That one does not pass the smell test; our concern here is potentially there may be a second venture being started or pursued, adding an extra element of risk to the transaction. From there, we review the lessee’s credit worthiness, company’s time in business, the asset and the price of that asset. Additionally, a business geographical location can impact the risk of a deal. Unemployment in Iowa City, IA is 4.0% vs. El Centro, CA is very high at 30%. Every deal is truly unique and special; the same underwriting principles are applied to each transaction.

Dave: Is there anything you see in common on the applications that don’t get approved?

Mike: There are common themes of transactions that do not get approved. The most common of course is credit history. Now more than ever, one’s lending history will have the biggest impact on their ability to secure financing. A company’s tenure is also very important; a business that is just starting out, as opposed to a business that has been in operation for twenty years will be viewed differently.

Dave: Is there anything the borrower can do prior to submitting their application to help prevent their application from getting declined or insure they get the best possible terms?

Mike: There are a few things a business owner can do in order to give their company the best chance of acquiring lease financing. The equipment use & justification are key areas that underwriters place focus on. Also, will the new assets be used to handle additional production? Or will the new asset be used to replace an older machine that is no longer operational. What is the value of the asset? For example, a bulldozer or CNC machine holds much more value than a software only deal, or office furniture.

If you have other questions you would like answered, leave them in the comments below. We’ll cover the rest of the questions Mike answered in next week’s post. Stay tuned!


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