Financiers assess the credit worthiness of a client via various quantitative and qualitative techniques. Credit assessment however is not a precise science and the credit judgement is often used to determine whether an application is approved or declined. The purpose of this document is to simplify the credit process and to give practical guidelines to make the process as efficient and profitable as possible. Financiers may look at a balance sheet differently to an Accountant or Financial Planner so it helps to understand how financiers assess credit applications.
Motor Vehicle and Equipment Finance vs Housing Finance Home Loans
Housing finance is based on a person’s ability to repay the loan but also a strong secondary position taken by the lender against the asset itself (i.e. a bank has the mortgage on a house). Commercial finance, which includes motor vehicle and equipment finance, is based predominantly on the cash flow of the borrower. Extra security is generally not taken against further assets (i.e. if the borrower defaults the financier can only recover funds from the resale value of the asset). Selling assets quickly at auction may resultin a significantly lower amount received especially for assets such as office equipment, furniture and fittings.
New equipment finance
Some equipment finance advisors starting to write business receive a difficult deal such as a fitout for an office or restaurant which is subsequently declined. This creates a negative image regarding motor vehicle and equipment finance that it is “too hard”. In reality, this type of finance is one of the easiest products to write especially if equipment finance advisors focus on the right types of clients and equipment.