Each week, we’ll interview one of our experienced Finance Officers for a brief question and answer session about something interesting from the week, along with tips and tricks to make your finance process easier, and their unique perspective on the industries and customers we work with.
A: The customer had told us when we first talked that he thought his credit score was well over 700, and when we ran it, it came in at a 590.
A: I wanted to look at someone that ran into a situation that would be worth explaining for anyone else looking for commercial lending. In this case, we overcame the objections of a competitor and their offer of financing. He was concerned about the overall payback. We were originally doing 48 months, I believe it was. I don’t remember how exactly he changed his mind. We had gone over payment and term options, but basically, saved the deal by recommending the shortest term, which I believe we had it at 18 months, because that was an overall cheaper cost of financing for him. Just knowing what his cash flows were, and the money the truck will bring in, he would have more than enough left over at the end of every month to cover the bill, plus have that marginal revenue, that additional revenue he was looking for, added to the bottom line. So, I did my best to explain that, and recommend that. He agreed, and we ended up redoing docs for 18 months and funded it.
A: It was, yeah, he was able to choose that. He got sent documents to him for 48 because the payments were lower each month, and then he looked over everything and started worrying about the payback, so I recommended the 18 months. Even though it was a larger monthly payment, it was a lot less of a payback.
A: Yeah, walked him through to make sure he understood how everything worked. It was just being upfront and honest about explaining how that worked, the security deposit and everything else, and then recommending a solution to his objections.
A: That’s a good question. Trying to do my best to think. Let me see what my transaction summary says. I usually note if they have prior commercial credit… New submission… Yeah, I do not remember anything coming up that he had commercial financing before.
A: Definitely. It’s a fairly accurate point. Like our credit team always says, this is an investment, so we should be looking at return on investment, and not necessarily the interest rate, and at the end of the day, the interest rate is just a percent, it’s not a true representation of an actual expense to them. That’s always one of the objections I have to clear the most – looking at commercial lending in a different light than other forms of lending people are used to.
A: Yeah, when we present the 48 month payback, we’re supposed to say is 63,000 on a $28,000-$30,000 unit. People say, “well that’s a 100% interest rate”. Well not quite, you know, interest is computed on an annual basis, while you’re correct that you’re essentially paying for twice the actual cash value, because of the time value of money, if we were to shorten up the term lengths to, say, 18 months, you’re only paying back 18 months which is a total of, say, $45,000, so you’re saving yourself about $20,000. I think that was about what this customer was going to save going with 18 months as opposed to the longer term.
Next week we will check in with another one of our finance officers in another office office. Stay up to date and learn more from our valuable resources at www.AmericanEFS.com/The-Bottom-Line