Rate shopping is an important part of seeking out financing. Understanding how much borrowing money is going to cost in both the short and long-term is key to making an intelligent, business-minded decision. Unfortunately, shopping for financing isn’t always about finding the best terms or rate. In some cases, people will shop for any possible lender who can get a deal done. Usually, these types of desperate measures were reserved for those who probably couldn’t get approved anywhere anyway, but recently a new form of this ‘shotgun’ approach has emerged.
Customers appreciate the ability to go to one place and get everything done. In a perfect world, a customer could go to their vendor to pick out the equipment, then get financed and funded, and make payments directly to their vendor as well. In the real world, it happens more like this:
1) Vendor takes a credit application
2) Vendor sends an application to their preferred lenders
3) If declined, vendor sends to alternative financing options
4) As a last ditch effort, the vendor might refer the customer to a brokerage house.
The problem with this scenario is, that many vendors are submitting transactions to multiple brokers rather than simply sending directly to funding sources. That is not to say that there aren’t good brokers. If there’s one thing I’ve learned from this business, it’s that there truly are professional brokers out there who know the business inside and out and can help their customers. The problem is that many brokers utilize the same funding sources. To understand why this is a problem, picture being on the other side of the equation.
Imagine that you are a loan officer at a bank, working in a department specializing in equipment financing. On a given day, you see a variety of applications, but on this day in particular you get bombarded by three different brokers with three different stories but the same applicant and roughly the same equipment. Each broker, when notified about the multiple submissions, is oblivious to the other brokers also working the deal. What’s more troubling is that the vendor is the person who submitted the deal to multiple brokers. Each broker then, in the course of trying to get the applicant approved, has submitted the customer to three or four funding sources a piece before converging at the same funding source before the loan officer now looking through the file.
This is a real scenario we encountered just the other day. Upon further investigation, it was discovered that the customer wasn’t even aware that as many as ten or eleven different lenders had reviewed their information. The moral of the story: customers need to ask more questions about where vendors and brokers are sending their applications. Utilizing the aforementioned ‘shotgun’ approach might expose the deal to more chances for approval, but it also raises red flags with a lot of lenders. For starters, it creates the impression that the customer is seeking out a lot of equipment at once. Because brokers package submissions differently, a more generic submission or a disparity in price could be incorrectly characterized as an additional ‘split’ transaction. Moreover, this strategy creates some doubt as to the credibility of the transaction and causes the lender to weigh statements from all of the brokers in making their decision, which can lead to an applicant being portrayed in an unfavorable light.
Lenders must have a permissible purpose to access a customer’s credit report per the Fair Credit Reporting Act. Most vendors and brokers use language in their credit release (next to the signature lines on the application) allowing this permission to be ‘assigned’ to the agents of the broker. Thus, when a customer signs a single application, their credit can be accessed by anyone who gets the application third hand and has the permission of the original party the customer applied with. The best way to prevent this from happening to require the vendor or brokerage to state in writing who they are submitting each transaction to. Don’t leave it up to them to simply ‘find a place that will approve you.’ Rather, take charge and ask to be involved in the process. Otherwise, you could be dealing with some red flags that will take a while to come down.
Managing a finance portfolio isn’t just about growing the number of performing accounts, or even keeping accounts in a performing status by quickly resolving collection issues. In fact, these operational tasks tend to be easily delegated and handled by most companies with experience. What is difficult, however, is deciding on how to temper the desire to grow with the desire to obtain a perfect balance of new accounts from a variety of industries.
Investors are no doubt well-aware of the age old advice to ‘diversify, diversify, diversify.’ Creating a portfolio of accounts as a funding source is not all that different from building an investment portfolio, and thus, is subject to the same wisdom. Establishing too deep a concentration in one or a few industries can be disastrous if the economic environment changes in a way that disproportionately impacts one of those sectors.
Summers are interesting for us as a funding source because we start to see a lot of people looking for change. People who have worked for a transportation company for years have decided to become owner/operators for the first time. Individuals with a background in logging have decided to obtain their own equipment and start their own operation (or continue where a failed one previously left off.) The problem is that companies like ours have to resist simply taking on all of the business before us. It’s tempting to grow as rapidly as possible (not to mention downright fulfilling to be able to help a lot of people get on the path to reaching their life goals), but throwing too many eggs in one basket can result in negative repercussions for everyone involved.
For us as a funding source if gas prices escalate unexpectedly or manufacturing subsidies are cut, it could be the start of a scenario where there are fewer opportunities for owner/operators. For our current customers, this could lead to a reduction in cash flow and a strain to make their payment to us. For customers in other industries, this could result in an increased cost of funds for new accounts, as companies like ours struggle to make up the difference in losses. One of the lesser known effects is that, ultimately, we might simply hand out fewer approvals to truckers or loggers.
Rather than allow economic factors to close off opportunities in certain fields, we prefer an approach rooted in keeping close tabs on the balance of industries in our portfolio. While we evaluate transactions on an individual basis and have no restrictions or biases with respect to industry, we also pay attention to our growth rates in different sectors to ensure they are in line with a stable expansion model. There is no perfect balance, we’ve found, as there is not so much an absolute composition we’re striving to mirror, but rather a dynamic set of rules that change on a daily basis.
Funding sources that make a conscious push to protect the future of their fund are not only guarding their own business interests, but are assuring future customers access to affordable financing with few, if any, restrictions. In that way, we have found at least one perfect balance: we’ve balanced our own desire to grow with our desire to continue to offer reliable equipment financing to our brokers, vendors, and customers.
From a customer’s perspective, the single most important part of any financing transaction is the part where the finance company cuts the final check. In commercial equipment financing, this culmination takes place when we send a wire or check to the vendor or private party our customer is buying their equipment or vehicle from. Unfortunately, this is the part of the transaction where companies like ours get especially cautious.
When monies go directly to a customer, as is the case with most direct-to-consumer lending, the customer can usually go trade their money for the goods they want to purchase. In our industry, conversely, there is some risk associated with paying the vendor. For starters, once monies go to the vendor, there are no guarantees regarding receipt of title or equipment in a timely fashion, or in some cases, at all. Pre-funding: it’s what we call paying a vendor or private party before a customer has received their equipment. In some transactions it’s unavoidable.
Recently, for example, we had to wire funds to a vendor a few states away because our customer wasn’t going to make it to the dealership before the wire cutoff and would have had to spend the night in another state if we missed the deadline. In most cases, however, we try to simply avoid pre-funding at all. It’s not simply a matter of protecting ourselves, though. We prefer to keep the best interests of our customers at heart, as well.
If we pay for equipment and the customer has signed a lease agreement with us, they are obligated to begin making their payments the following month. That means, even if the equipment isn’t what it was purported to be–even if the title is a salvage or there are substantial damages or the equipment isn’t ready for use (which are all situations we’ve encountered)–the customer is liable to our contract. If we don’t do our due diligence and protect our side of the transaction, our customer could be put in a bad spot which could promote ill will.
In a private party transaction, paying the individual before delivery of the equipment can be disastrous, too. If a seller misrepresents a title as free and clear when it has a lien on it, or “forgets” to mention a serious defect, it could leave few options apart from legal action, and that could take some time to work out. There is almost no way to get money back in a timely fashion once it’s paid out. Money is, after all, the ultimate leverage in a financial transaction. Holding the money gives you the power to ensure the transaction is completed as promised. In our case, it protects our interest as the lessor of the equipment, and it protects our customer’s interest as the buyer.
Pre-funding transactions is a common practice for some of our competitors. In fact, many of them won’t even think twice before writing a check or sending out a wire. We, like others in the industry, do find ourselves in situations where pre-funding is a requirement to complete the transaction. In those cases, we secure many layers of protection. We get a Bill of Sale signed, we ask for copies of the title signed off, we ask for a copy of the bond for a dealership. These are just some of the ways we equalize the ‘playing field’ in a transaction. In the end, the truth is, we never feel totally okay about pre-funding.
So, while we can’t entirely escape the perils of pre-funding, we have made it our goal to educate our customers about just why we’re so cautious about sending out the money before they have the equipment. Pre-funds are easy to make happen, refunds on the other hand, are hard to come by. There is a right way to do a transaction and a wrong way, and no legitimate vendor or seller will ever balk at a fair arrangement that allows you to trade payment for equipment in person. This is also a reason a lot of our customers prefer to deal with vendors they can visit in person. Hopefully, knowing the risks will make you think twice the next time the vendor is breathing down your throat to get paid before you get your equipment.
Consumers are more conscious of their finances than ever before. Want to see the evidence? Just turn on your television and watch the array of credit report and score products being advertised on commercials while you’re watching your favorite primetime shows. Little do many people realize, however, that ‘Freecreditreport.com,’ ‘Creditchecktotal.com,’ ‘Freecreditscore.com,’ ‘Truecredit.com,’ and many of the other well-known consumer credit report and score services are actually owned by the major credit bureaus themselves.
Most people don’t see a problem with this scenario. After all, Equifax, Experian, and TransUnion are the best repositories for consumer credit information–which means the information they supply is necessarily accurate, right? The fact is, that’s only partially true. While we at American Leasing & Financial will always advocate that customers view their credit reports frequently and stay on top of their information, we’ve begun to notice a concerning pattern that seems to be impacting a lot of consumers in a negative way.
Consumer credit scores are a dime a dozen. That is to say, there are no less than thirty major credit scoring models being pawned off as ‘your credit score.’ There are a variety of ways to ‘score’ a credit report, but the number most consumers see when they make buy their credit score from the major credit bureaus is almost never the same number we see as lenders on the other side of a financial transaction. One of the most common scores consumers buy is their ‘Plus’ score, a score originally created by Experian themselves. The Plus score, for all intents and purposes, is supposed to do the same thing as the FICO score: it measures a consumer’s creditworthiness. Unfortunately, it does so in some very different ways.
For starters, the Plus model ranges from 330 to 830 (as opposed to the 300 to 850 range espoused by the scores we use.) In addition, the mission statement of the Plus score is mostly educational in nature. Experian’s executives call this being ‘consumer focused.’ The reality is that by using a different scale and placing different weights on categories, consumer’s get a skewed (at best) view of their credit score. The Plus score has often been the culprit when customers call and tell us they have a 680 credit score, and we pull their credit only to find a 560.
Still other scoring models like the VantageScore model go all the way up to 990. Suddenly, a 700 credit score doesn’t sound so good, does it? We are constantly trying to educate consumers on the basics of credit scoring. Most lenders, even those in the commercial finance business (like ourselves) utilize FICO scoring models, created by a company called Fair Issac Corporation. Thus, to guarantee you’re looking at a score as close as possible to what a potential lender might see, you should only pay for a FICO score. FICO scores are available for purchase here. Recently, a new amendment to the Dodd-Frank legislation that passed last year has made it the law that any lender that denies a consumer for credit or charges a higher-than-normal interest rate is required by law to provide that consumer with their FICO score. You can read more about that in this article.
To learn more about the factors that impact your credit score, check out our free e-book.
Those familiar with this business will probably have heard the phrase ‘rebrokered transaction.’ It refers to a scenario in which a customer is passed from broker to broker in search of a final funding source, often leaving the finance or leasing company oblivious to the true origin of the deal and many of the pertinent details.
The part of my job that I enjoy the most is that I often get to speak with brokers all over the country who have customers in our funding region. Speaking with people with diverse experiences helps give much needed perspective on the differences in how people do business. One of the most common questions we field from our brokers, then, is the age old: “Will you accept a re-brokered transaction?”
The problem, from our side of things, is that rebrokered transactions are often ‘washed,’ where relevant facts are omitted to increase the chances for approval. In a bilateral relationship between a single broker and funding source, Broker Agreements and a standing rapport often prevent this from happening. When a transaction is passed between brokers, on the other hand, a cloak of anonymity helps hide glaring inconsistencies while disguising the culprit responsible for hiding them.
This series of events is usually a recipe for disaster: an applicant that looks good on paper can quickly begin to transform into a very different kind of applicant. It’s not always a matter of fraud, sometimes something as simple as the fact that the applicant is married or the broker is related to the vendor can be hidden. Our credit department relies on completely accurate information to inform the decisions we make. When we issue an approval, we don’t take it lightly.
Recently, one of our sister companies from the midwest told me about a transaction that reminded me why we steer clear of rebrokering. An application on unfamiliar letterhead that had been covered with whiteout (unsuccessfully) came over to their office, along with bank statements and a credit report. The credit report looked good, with both applicants having scores in the high 700’s. The bank statements were outstanding, as well: plenty of cash flow to support the mid-sized transaction they were looking to get funded.
After they had submitted an approval, the owners started thinking about the unfamiliar letterhead (which looked different than what the broker would normally have sent over.) The next morning, one of them called the broker up and inquired about the origin of the transaction. Then, it was discovered that the transaction had already passed through three brokers or more. To clear their conscience, the owners did some more due diligence and found some astounding discoveries.
Not only were there no such credit files on the two applicants when they attempted to pull credit themselves, but the bank listed on the bank statements claimed they had no relationship with them either. When confronted, the broker said he nothing about the misrepresentations, but, by then, there was no way to tell who had forged the documents.
We’re very careful about who we do business with, but there is no way to be sure we’re getting complete and accurate information without knowing where the information is coming from. So when I hear, “Do you all do rebrokered transactions?” I answer succinctly, “Nope.”
One of the most common misconceptions with respect to credit scoring is the idea that one’s credit score is an indicator of how well they pay their bills on time. Sure, that’s part of it, but credit scoring algorithms are substantially more nuanced than people are led to believe. I can’t tell you how many times I’ve had an applicant vehemently swear that they should have a near perfect credit score, only to see the credit score come back in the mid 650’s. The reason has less to do with people not managing their credit as well as they think they are, and more to do with how truly detached the modern consumer is with the formula that determines what their credit score actually is.
For example, many people carry a small balance on their cards each month due to the longstanding belief that carrying a small balance is better than carrying no balance. The truth is, even if they’re small balances, most credit scoring formulas (including the widely popular Fair Issac–or FICO–models) penalize a consumer for having too many accounts with a balance. In the same way, sometimes people pay their cards in full each month but do so after the statement closing date, so that a group of credit cards which actually have no balance report as though they do have a balance each month.
Another issue I run into frequently is that there is often a disparity in credit between husband and wife. The fact is, the Fair Credit Reporting Act has guaranteed that accounts in which an individual is designated an ‘Authorized User’ are still to be scored just as they are for the primary accountholder. Many individuals don’t realize that by simply adding their spouse to their existing credit card accounts, they can pad their spouse’s file and close any gap between their credit scores.
A basic rundown of the most commonly used lender score formulas is as follows:
– Payment History – (35%)
– Utilization/Capacity/Balances Owed – (30%)
– Length of Credit History – (15%)
– Types of Credit – (10%)
– New Credit – (10%)
What makes all of this interesting is that because of the respective weights assigned to different categories, there are people who have had late payments in the last few years with credit scores higher than those who pay all of their bills on time always. Because personal credit is key to strengthening your ability to personally guarantee a transaction, we believe it’s important to educate our consumers on credit matters. For more information, please check out our free guide to Understanding Your Credit Score here.
