Truck Loans & Truck Leases

By: Robert Jacobs

Lessors typically are interested in four key areas when underwriting a truck equipment lease application:

1)Credit History of the applicant(s). Lessor wants to be assured that the guarantor has a history of paying their bills and that they do not have any liens that would take priority should the lessee encounter some financial difficulties and can't make payments.

2)Time In Business (TIB). The lessor is looking for at least 2 years in business so that they can confirm that there is a sufficient monthly revenue stream generated by the business to make payments on the truck(s).

3)Cash Reserve in the bank. Again, the lessor is concerned about ability of the lessee to make payments should there be dips in the revenue stream. Lessors typically look for bank reserves that are at least consistently equal to the amount of the monthly payment.

4)Type of Truck. There are all kinds of work trucks. Without naming all of the kinds of trucks that can and are lease-financed, suffice to say that ANY over-the-road tractor/trailers are the most risky for the lessor to finance. Why? Simply stated, the nature of being on the road many hours each day on the open highways make it risky for a lessor to finance the purchase. The risk of the truck being involved in an accident is greater to the lessor. While the truck is always insured, there is also always a greater risk to that equipment due to the hazards of the open road.

Memo: Depending on how conservative the lessor's underwriting parameters, there can be other screening elements that are considered for a truck lease application. However, these are the four main considerations that an owner-operator must understand/address before applying for lease-financing.

Let's examine each of these four underwriting elements and determine what, if anything, can be done by the owner-operator to off-set any negative derogatories.

1)Credit history. Regardless of the nature of the business, this is a major, if not THE major item that can cause the new trucking company to get turned down. This credit hurdle must be satisfied before any hope of getting lease-financing can be achieved. However, there are ways to off-set a low score on credit.

The easiest and most secure for the lessor is to have co-guarantors to secure the deal. Some lessors are more specific about who the co-guarantor can be. Some will want a co-guarantor from the trucking industry, with a track record of success. Others are less specific and will accept anyone who has a good credit score and is willing to co-guarantee the financing.

Note that some lessors have a very mechanical scoring method to determine whether or not all guarantors have sufficient credit depth to qualify. Other lessors are not as concerned about the hard score (FICO) as they are about the STORY behind the score.

So, if turned down, try another leasing source. Don't overlook alternate sources for lease-financing. There are sources other than banks or the captive leasing arm of the truck dealer. These alternate sources are always more flexible in their underwriting parameters. There are sources that will even lease-finance private party transactions.

2)Time In Business (TIB). Without sufficient TIB, lessors have no company history to give them a warm fuzzy feeling that they will get paid. So, in addition to the truck that is being lease-financed, the lessor (those that will) will look for additional collateral to secure the financing.

This will often have to be real estate (considered to be the most secure form of collateral). Others will accept equipment that is 100% owned by the lessee. However, keep in mind that lessors will often limit the Loan to Value (LTV) to $0.25 on the dollar on used equipment.

Some lessors will accept Sole Proprietors with 2 years in business if they can prove TIB with 2 years of Schedule C's from their tax returns AND the owner is willing to reorganize as a Limited Liability Company (LLC).

3)Cash Reserve. As the trucking company is new, there is apt to be little cash reserve in the bank. There are exceptions to this, as some start-up trucking companies are well financed and have anticipated the lessor's requirements in this area. Lacking the required business reserves, the owner(s) or co-guarantors will have to have sufficient reserves in their personal checking accounts.

Some lessors, who are less conservative, will sometimes accept personal reserves to off-set lack of business reserves. This one of the reasons that guarantors have to personally guarantee the lease-financing.

4)Type of Truck. There is no solid off-set to risk for an over-the-road truck, other than the three areas mentioned above. The stronger the other 3 items, the more apt the lessor is to approve the start-up, over-the-road owner-operator trucking company. In addition, some conservative lessors insist that the new trucking company be organized at least as a Limited Liability Company (LLC), to further protect the company assets.

In summary, start-up owner-operator, over-the-road trucking companies can get lease-financing to acquire their trucks. However, they need to focus on these four areas and shore up the strength of each of these key items to bolster their chances of getting approved. If weak in any one area, the other areas have to very strong to off-set that weakness. Regardless of which lessor that will ultimately fund these type transactions, the lessee is not going to enjoy bank rates because of the risks involved.

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