What is a financing proposal you say? If you are a business owner who has financed equipment in the past, you may still have never heard of a financing proposal. A financing proposal is a term sheet with proposed terms such as length of term, monthly payment, and down payment. The customer reviews the terms and if they are acceptable, signs and returns to the lender along with a security deposit. The terms are generally based off a quick overview of the customer’s credit file.
However, these term sheets come with sneaky fine print that you should always check for. The security deposit will be kept by the lender, despite what happens to the transaction. If the lender can’t offer you the terms you agreed upon, guess what? They are still keeping the security deposit. If the lender can’t offer you any type of loan at all, they are still keeping the security deposit. If at any point before underwriting is complete, and you change your mind? Yup, they are still going to keep your security deposit.
The good news is that if you move forward with the loan after underwriting is complete, most of the time your security deposit will be applied toward your loan balance. The bad news is that if you decide to not move forward with the loan, the lender will keep it and you walk away at a loss. The security deposit is generally a percentage of the total loan, so this could be a significant chunk of change. The idea behind the security deposit is that the lender is paying underwriting for their time despite what happens to the loan.
Financing proposals do have a place in equipment financing industry. Some loans and leases are more complex than others. Some businesses are looking for loans on typically restricted industries. An example would be for cannabis equipment financing. Many times these deals are very complex and involve multiple owners. That means that the lender has to pull and review the credit file on each. This can take a lot of time and expertise, so a nonrefundable deposit in this scenario would be understandable.
Financing proposals do not have a place in typical transactions. Examples would include an established towing company adding a truck to their fleet. Or an established molding company adding a CNC machine to the shop. I caution you to work with any lender who asks you to sign a proposal and send a check for a standard transaction. This is just about greed and milking you for the most money they can get. If you are working with a lender like this, I urge you to read the fine print on any proposals they send to you before signing anything.
What you should expect in a typical transaction:
- Apply for the loan
- Provide any additional information requested by the lender
- Receive credit decision
- If approved, review terms with lender to make sure you understand what you are signing
- Receive and sign finance agreement
- If down payment is required, provide your ACH info or send a check
- Equipment vendor receives funding from the lender
- Pick up your equipment
- Go out for ice cream
And that’s about it, folks. Don’t let lenders make equipment financing any more difficult than it needs to be. If you are looking for equipment financing, and would like to get more information on our programs, contact us here.