Personal Credit and Business Borrowing
Why do banks and equipment leasing companies look at personal credit and require personal guarantees from business owners? With the exception of public corporations and large firms with multi-million dollar net worths, the expectation of a business to fulfill its obligations is critically linked to the business owner’s personal finances. Lenders and lessors are not in the equipment sales business. We cannot threaten to hold off repair of the equipment In most cases we are not experts in the equipment that we may have to repossess and sell, and our fast turn-around time is predicated, in part, upon our avoiding any detailed equipment evaluation.
We are reliant upon the intentions and ability of business owners to maintain our payments as priorities. We require the assurance that our lease will be given the same concern as other important debt relationships. This is particularly serious when the lessee’s bank has such guarantees. [We will often consider requests to waive “PG’s” if the customer’s bank has also waived them.]
On the negative side, a sloppy or negative personal credit report will too often be a result of and/or a precursor to a serious business downturn. Banks and lessors must know about that to make prudent credit decisions. Often, the applicant’s desire to have the guaranty waived gives the credit team an impression that the borrower knows of an impending financial problem.
On a more positive note, we want to make sure you remember to protect us when you sell your business to Bill Gates for three billion dollars. We hate it when Bill’s attorney calls to tell us to pick up the used equipment from the business they just bought.
“But my lawyer said I have a corporation and should never sign a personal guaranty.” While a corporate structure should protect you from certain unforeseen contingencies, it should not keep agreements from being honored. Ask your lawyer if he would tell his clients to lend money to a small corporation if the owner refused to guaranty the debt. Of course not! It’s one thing to advise a client to be prudent. It’s quite another to mislead a client into believing he can obtain business borrowing without meeting normal requirements. We have seen crucial equipment acquisitions delayed for weeks when first-time borrowers were encouraged to demand the impossible.
Why check your own credit file? There are many important reasons to periodically draw your own report. A full discussion of many of them is available by clicking on the Equifax logo, above. For the business owner there is an extra consideration. Experts will tell you that an occasional inquiry on your credit report is fine. Multiple inquiries in a brief time period, however, are very detrimental to your credit “score.” Being able to provide a reliable indication of your credit profile during your early discussions with lessors and lease brokers will enable them to give you realistic lease proposals before they add inquiries to your record.
We have seen hundreds of credit scores pushed lower by business owners who “shotgun” full applications including Social Security Numbers to numerous lenders with the intention of shopping for the best rate. Shopping is good, but a reputable lessor will ask about your credit history to make sure there is a reasonable fit before sullying your credit picture with needless inquiries.
If you’ve done your homework, and have a comfort level with a lender or leasing company because it’s been highly recommended by a trusted quality vendor, or close respected associate, you have everything to gain by openly discussing your rating. If it’s marginal, be candid. If it means he dissuades you from applying, your score in the future will be one inquiry less troubled. If it is real good, tell him! Let him know that you are a candidate for his best figures.
We receive many requests each week for information on how to obtain a report. HERE IS A LINK to a private company that’s been authorized by the government to provide, once a year, your report to you without penalty or cost. While it will not give you your score, it will allow you to check for errors. We do NOT necessarily recommend any other additional services they may offer.