Since October my company has been working with a very respectable company to assist them in restructuring some of their debt. They are in an industry that I would carefully call “recession proof.” By that I mean the service they provide has not only escaped the recession, but business is up significantly for their current fiscal year, which began June 1, 2008.
Our client company is nearly 40 years old, employs over 2,500 employees nationwide, and operates in many states. They have been profitable nearly every year until 2007 when they suffered a non-operating loss of about $200,000 as a result of ending a contract with one of their customers. They are nearly through with their fiscal year and will end it on May 31, 2009 with a very decent profit before taxes of $500,000 on revenues of about $22 million. For their industry which operates on tight margins, this is good.
During the process of restructuring the company’s debt, our client needed eight new pieces of equipment totaling a little over $1 million. Neither we nor the company could obtain traditional bank financing for the equipment in one note; however, they were able to secure lease financing on six of the eight pieces of equipment with six different equipment leases from six different leasing companies. When it came to getting lease financing on the last two pieces of equipment, we ran into a brick wall. So many reputable leasing companies had seen the transaction and the ones who were good candidates had already provided financing up to their comfort threshold.
After trying nearly 20 different reputable leasing companies, we were at a standstill. One leasing company advised us that leasing companies were not making leases when the company “had a story.” In this case the story was related to the year of non-operating losses. We could show them nine months of this year’s profit history but the bottom line was last year the company suffered a $200,000 loss. That was the story that held us up.
Another client of ours gave us the name of a leasing company that had offered to do a lease on the same kind of equipment. We contacted them and received a favorable reply. They said they wanted to lease the equipment to our client.
Our next step was to ask them for three references that we could call. We wanted to know the company was reputable. The company wanted a $14,000 down payment on the lease before they provided the financing to the equipment vendor. Although this didn’t seem too unusual, there were other red flags that started popping up. The company’s Web site showed to be under construction. When you called the company’s offices the phone was answered by a professional answering service, not employees of the leasing company.
When I used Google map to look up the physical address of the leasing company I discovered it was a private postal address. When the leasing company owner refused to provide three references we were pretty sure the company was in the business of defrauding potential customers. The Better Business Bureau in the state this leasing company was based did show the company with a “grade of C” but hadn’t received any complaints that weren’t settled.
For us, the last red flag was a pattern of the leasing company owner refusing to put anything in writing. He would only engage in verbal discussions and agreements but wanted our client to send the $14,000 right away.
We can’t say that this particular leasing company is a scam, but there are certainly many red flags and reasons why we have chosen to go back to our client and suggest they not move forward any further with the finance company.
Here are some hints on making sure you are doing business with a reputable commercial finance company:
- Check references. Ask the references how they found out about the particular finance company you are considering. If it was another customer, ask to check that reference too.
- Determine if the finance company is a member in good standing with one of the trade associations representing that industry. For leasing use the National Association of Leasing Brokers or the Equipment Leasing and Finance Foundation.
- If you are using factoring, check the factor’s membership in the International Factoring Association or Commercial Finance Association (CFA). Asset-based lenders are more likely to be members of the CFA.
- Check the Better Business Bureau in your state to see if there are any unresolved complaints against the company.
- Use several search engines using the name of the finance company and the word complaint. You may be surprised at what you find.
- Before you get very far into the process ask to see a sample specimen of their standard agreement. Read it carefully and make sure you feel comfortable with the terms and conditions.
- If you are using factoring, you need to know every potential cost the factoring company may charge you. Using a factoring terms and cost comparison sheet is very helpful.
The key to being careful is to do your own due diligence on the commercial leasing company, factoring, or asset-based lender so you go into the transaction with your eyes wide open.
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