Understanding the credit and application process
As originators of commercial equipment backed debt Pelagic Capital Corporation has an obligation to review and measure risk through an underwriting process.
It is important to understand that the capital structure of a lender may include many components, some of which include additional borrowing by the lender, or, many layers of debt, including commercial securitized debt.
Throughout this capital procurement process an assessment of potential and historical loss drives the understanding and acceptance of risk as well as the necessary premium associated to risk as part of the cost of capital.
Therefore, having a codified underwriting standard becomes paramount in maintaining the integrity of the risk management and in the relative pricing of each deal contributing to a portfolio.
So, why is this all important to you, as the borrower?
Preparing a package which meets the credit standards of the underwriting process becomes an integral part of your ability to be approved and ultimately funded.
What is underwriting?
The word “underwriter” is said to have come from the practice of having each risk-taker write his or her name under the total amount of risk that he or she was willing to accept at a specified premium. In a way, this is still true today, as new issues are usually brought to market by an underwriting syndicate in which each firm takes the responsibility (and risk) of selling its specific allotment.
We use the term underwriting more liberally to describe the process for which your application will be processed, reviewed, structured, priced, and either approved or declined.
Lastly, a core tool of the underwriting process includes the use of the five C’s of credit;
Lenders use policies, procedures, and analyses when determining if and how much money to lend to clients. The methods used by lenders are often summarized by categorizing lending analysis as the five Cs of credit. The five Cs of credit are character, capital, capacity, conditions and collateral. Lenders use the five Cs for specific reasons respective to each category, but all are utilized to understand the risk of default on a loan.
It is important to a lender to have significant comfort with the character of its prospective borrowers. Indicators such as credit rating and borrowing history coupled with more qualitative factors such as honesty and integrity all support a case for a borrower’s willingness and ability to repay a loan.
A lender needs to understand the capital position of the prospective borrower’s business or personal wealth. More capital represents the borrower’s ability to withstand volatility. It also demonstrates the commitment an owner of a borrowing entity maintains. A strong capital position reassures a lender of repayment capacity in a borrower.
Understanding capacity to repay a loan is critical for a lender during the underwriting process. Capacity is determined by the borrower’s ability to generate cash flow to service the interest and principal on the loan. Strong cash flow from borrowers’ normal business activities demonstrates capacity to repay debt and mitigates the probability of default.
A lender must also understand the broader market conditions affecting the industry, segment, market and overall economy in which its borrowers engage in commerce. Strong industry growth or economic conditions support a business’ ability to generate cash and repay debt.
Lenders often take a security interest or lien on borrower collateral. In the event a borrower is not able to repay debt with its cash flow, a lender must rely on the quality and sale ability of borrower collateral to repay the loan. A robust analysis of the collateral supporting a loan is an important step in granting a loan.
Finally, your ability to prepare and present an application package will, in many ways affect your ability to procure credit.
Generally, your deal size will dictate what will be required in your application package, common deal sizes are as follows;
• Small ticket – up to $150,00
Typically, application only to between $50,000-$75,000
Includes bank statements and tax returns when between $75,000 – $150,000
• Mid ticket – up to $750,000
Includes the above plus 3 years corporate financials, tax, and interims
• Large Ticket – up to several million
Includes the above, plus any number of additional items germane to the borrower or deal
Some potential requested items;
If borrowing for a sole proprietorship or closely held company ( a personal guarantee is likely);
•Provide a complete, legible, accurate application form.
• Provide an itemized invoice, sales order, or purchase order
• Provide a specification sheet of the equipment including serial numbers or vin’s.
• Have available your last 3 months of either company or personal banking statements.
• Have your last two years personal tax returns available
• Have a copy of your personal financial statement prepared (personal balance sheet)
If borrowing for a corporation;
• Have your last two years audited company tax returns available. If not audited, your reviewed or compiled statements with corroborating tax returns.
• Have your interim balance sheet and income statement available for the period between your last tax return and the time of your application.
• Prepare a backlog of current work or outstanding receivables due to you.
We hope this primer prepares you to better understand the underwriting process of equipment finance.
Whether your needs include replacing equipment, upgrading equipment, or acquiring new equipment for growth, Pelagic Capital Corporation is here to help with all of your equipment financing and leasing needs. Having prior funded hundreds of millions of dollars of equipment we understand the ins and outs of getting you funded.
Call or email today (203)659-8114 or email@example.com
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