Credit Ratings and Application Documents (no-doc to full-docs) Requirements

Credit ratings (A, B, C, D) give a quick letter grade to an individual’s credit history. This allows financial institutions to determine how likely an individual will pay money back if given a loan, as well as employers to verify how responsible their employees are.

FICO designates letter grades to credit score numbers in the following way: "A" rating is 720+ (excellent), "B" rating is 650+ (good), "C" rating is 575+ (average), and below 575 is a "D" rating (poor). Different lenders may vary from these standard four credit ratings (i.e., A+, C-).

To evaluate the credit worthiness of small and medium businesses lenders typically use Paynet score, Experian Business Information System (Business Intelli-score and Financial Stability score), and Paydex score from Dunn & Bradstreet. For example, a Paynet score of 680 and above is typically considered an A business credit.

Business and business owner’s personal credit scores are crucial factors in business lending such as equipment financing and invoice/accounts receivable financing. Higher business/personal credit scores along with new equipment purchase usually allows the borrower access no-doc applications. On the other side, medium or lower credit scores along with existing, older, or non-popular (thin secondary market) equipment typically requires the borrower to provide full documentation.

Pricing or rate is always a reflection of risk. In equipment financing the basic information required is as follows:

No-doc pre-approval:

• Application form (business information, owner information, equipment information)
• Invoice(s) for equipment(s)
• Lender pulls paynet and personal FICO

Full-doc Items needed for credit approval or pre-approval:

• Two Most Recent Years Personal Tax Returns w/K1’s.
• Two Most Recent Years Business Tax Returns (if applicable).
• Current Personal Financial Statement (PFS), include mortgage monthly payment amount and year acquired.
• Copy of One month’s most recent Bank and Brokerage Statements to verify cash on PFS (no screenshots, only full statements).
• Most Recent Paystub (if applicable).
• Debt schedule (may be necessary)
• Completed Client Information Form (lender provides the form)
• Completed Checklist (lender provides the list)
• Specific operational requirement (if applicable) Sheet.
• Copy of Driver’s (and/or Pilot’s, operator’s if applicable) License

Based on the type of equipment, as well as business/owner credit profile, additional supporting documents maybe required to help the underwriter make credit decisions.

Occasionally, business owners use real estate as collateral to apply loans. Since the business already owns the properties (potentially with existing mortgages) the cash proceed from borrowing is potentially used for working capital. The following is a typical list of items that must be provided for consideration:

• Type of property:
• Address of property:
• Rent roll and occupancy rate:
• Length of leases:
• Date of purchase & purchase price:
• Underlying mortgage balance:
• Estimated value:
• Date of last appraisal (do you have a copy? If so we would like to see it)
• Entity that owns the property
• Can you document income (if not stated or no doc loans are available at a higher rate to reflect the increased risk)
• P&L and financial statements
• FICO score
• Are you current on your mortgage?
• How much cash are you looking for and what is the use of the cash?
• How has covid affected their business?

Once above preliminary application materials are provided the underwriter may come back with additional questions and potentially more requests for supporting documents. At the end of this step, suppose everything works out to the applicant’s favor and the provided documents support a pre-approval, a loan proposal will be provided for the borrower to consider and to negotiate, if necessary.

A typical loan proposal looks like the following example:

LOAN PROPOSAL FOR ABC Company (borrower) from XYZ Lender Inc.

$XXX, or up to 80% of the equipment’s appraised Net Forced Liquidation Value, based on an appraisal by the XYZ Lender Inc.

• Interest: X% interest on balance due monthly, fully amortized over four years.
• Two-year minimum interest charge if paid off before the four-year term.
• 4.0% origination fee, out of which 2.0% will be paid to broker (if any).
• A First Lien position on all the equipment provided to us as per the list as on-encumbered, a blanket lien on unencumbered equipment and a 2nd lien position on all encumbered equipment.
• Debtor will be responsible for paying for all loan documentation, attorney fees of approximately $xxx.
• Debtor will have the landlord provide a Landlord’s Waiver in favor of XYZ lender.
• Debtor will be current on all corporate withholding tax obligations prior to the transfer of the loan principal.
• Debtor will provide yearly proof of payment of all personal property taxes.
• Debtors will provide a personal guarantee.
• Debtor will pay $xx, for a virtual (or onsite), itemized auction value appraisal of the equipment to be performed by XYZ lender Inc.
• Debtor will name XYZ lender Inc. as co-insured on a liability, fire & theft insurance policy.
• This proposal will expire two weeks from the date of this proposal.

At the bottom of the loan proposal is the lender’s signature and space for borrower to sign. An interview between the borrower and the lender will be arranged if the loan proposal is accepted.

Questions asked by the underwriter at the time of interview:

1. Do you have any other loans outstanding? If yes, client may have to pay off the outstanding loan before taking this loan. Also, client may elect to use part of the loan proceeds from this loan to pay off the outstanding loan with potential extra cash left for operating capital. If the equipment is an existing equipment the business already owns, a question like what are you going to use the loan proceeds for this list of used equipment?
2. Do you have liens or UCC outstanding? On what equipment?
3. Are any of the equipment on this list you provided us under liens or have other UCC filings? Existing equipment has to be free and clear to qualify as a collateral.
4. Preliminary liquidation value the lender depends on could be derived through a desktop process by experienced appraiser through estimation. This estimation might involve no extensive paperwork or process to derive the liquidation value. If the borrower wants to have the paperwork for this initial liquidation value estimation the lender may have to charge the borrower.
5. The appraisal could be conducted virtually for $xx or physically for $xxx. Once client pay the virtual/physical appraisal fee the appraisal schedule will be arranged.
6. Once the appraisal is done and a specific loan amount is determined client will have to accept the loan terms by paying a $xxx legal closing fee (this is not a deposit. It is the legal and documentation fee.) Closing typically take 1-2 weeks.