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.
This week, we caught up with Travis Van Houten in our Portland office who talks about how different term lengths can affect a commercial lending deal, and how this affected a recently funded customer.
Q: Hey, Travis! I’m glad we had a chance to connect. I know we’ve had a couple of Q&A’s now. Has there been anything interesting since the last time we talked?
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.
Q: Is that typical?
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.
Q: For the 18 months that were presented, was that something that was on the table at the beginning?
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.
Q: So, you walked him through what the implications were of each term length?
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.
Q: For that process, it sounded like he hadn’t done commercial lending before. Does that kind of sound like that was the case here?
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.
Q: I think something that comes up for people that haven’t done commercial lending before, they tend to compare it to a lot of the common lending solutions, like with their automobile, or anything else. A lot of what people don’t think about is the balance of what they’re bringing in every month with the new equipment, and what their monthly payments are in comparison. Do you find that is something that you have to explain to a vast majority of the people that you work with?
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.
Q: Definitely, so as far as the difference that it made for him, do you have any specifics numbers? Or, for anyone, when you’re going from 48 months to 18 months, would you say that that’s a pretty drastic change for the overall payback?
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.
Q: I think that that is definitely a good point to make for this particular topic – keeping the different pros and cons of different term lengths in mind ahead of time, whenever you’re looking at any commercial deal. Especially when looking at terms that are presented to you with the PreQual system, because that’s obviously something that we lean into, that you need to decide what terms lengths will work best for your business, because obviously it was a big decision point for this particular customer.
A: Exactly.
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
