By Rev. Or. K. Bill Dost

Often maligned as subprime, high risk and expensive, “C” credit leases, especially in the small ticket market place, are a necessary and important driver in the overall economic market place today. While many may see this as a bold assertion the truth is that most simply do not want to be associated with the perceived stigma of an off-plan ‘risk’ portfolio, or being seen to offer an overly expensive rate for their financing product. The reality is that with good correlation between the two there is nothing to be ashamed of about offering, or accepting a “C” credit product. The fact is, it is precisely this sector of small ticket, “C” rate customers that are contributing to growing the economy faster than many of the “A” credit risk or blue chip companies.

One has to accept in most of the major western economies, it is the small businesses that far outweigh the larger ones when it comes to overall employees and revenues; as is often said it is the small business that is the backbone of the country. In Canada there are 2.4 million businesses registered with Canada Revenue Agency, half of which have 1 or more employees. Of  the 1.2 million businesses that have employees, 75 per cent have less than 10 and 55 per cent have less than 4. The number of companies that have more than 100 employees across all of Canada is less than 25,000 (source: Key Small Business Statistics – July 2012 by Industry Canada). What this means then is most businesses in Canada are classified as small and this is where small ticket funders and “C” credit businesses spend most of their funding. It ls these smaller turnover businesses, which typically eke out an existence, and struggle to raise the necessarily investment for their needed asset purchases. Purchases that would help them grow their businesses. It is also these businesses that USED to turn to their banks for support, support that since the credit crunch has largely dissipated or simply gone away as a result of unwillingness, or in some countries an inability, to support. Solutions are limited often coming down to providing credit card application for purchases below $10,000 to giving an outright no to the request. In often cruel twists of fate, some banks have been known to terminate existing credit lines or ask a client who may wish to borrow $25,000 and more to first secure the funds by way of another financial instrument at the bank, such as a GIC, prior to being offered a lend of the same amount. In essence, the customer is borrowing their own money from the bank at interest.

As a result the “C” space is in fact widening not narrowing.

There is a need for a suite of finance products into this arena, where the balance sheet is not the determining factor, and where the equipment required is not always of a pre-determined, or any, resale value. The customer concerned may not have significant years of credit traction or tangible multiples of security to offer, or may be undergoing change in their business. They may be a customer that maintains a constant demand for capital in their enterprise. None of these profiles are without risk, and this is where a specialist in the small ticket market and specifically the “C” credit market comes in.

Enter a specialist leasing company, or a leasing broker, who can understand the challenges of the customer and knows how to get the transaction done. In either case, the funder or broker, understands that the customer must be priced to their risk level, but at the same time they also understand that this customer is in essence Canada’s backbone and deserves help and support to grow. It is the duty of a funding source to ensure that customers in this small business segment receive the assistance they need. As these customers grow and succeed, then Canada and her economy will also continue to grow and succeed.

These are not the only place that a boutique rate is important; just common examples. One will find that higher rates in the small ticket sector will be found for numerous reasons, often it’s to top up wider funding requirements when a panel of A and B funders have been exhausted. This so called exposure issue, ensures that a customer is able to complete their entire financing project with an overall blended interest rate inside of their desired parameters, even if one funder ends up being more expensive. However, “C” funding can also be effective when a customer may be weak, the asset may be undesirable, the business simply may be new, or if the financing request itself is bespoke (think midterm skip payments, once a year payment forgiveness, rescheduling of leases, step and seasonal leases, funding of websites, mail servers and creation of apps for smart phones and the list goes on; mobile dance floors and AstroTurf anyone?). “C” rates, when effectively used should be a source of funds to catch the weird, the unique and the outside the box requests.  They are of value when the deal requires story underwriting as opposed to balance sheet ratios and automated scoring. The important  idea is those that work in these specialist fields bring a needed service to the marketplace.  They are helping the economy purchase equipment and assets that lead to growth. It’s a grass roots level, individual process, but for the customer, it helps to fund their business so if they have to pay a little more for that level of service they really do not mind. They are getting what they need which is the asset, the asset is going to grow their business, and the business is going to fund their life and lifestyle.

“The C space is widening not narrowing and there is a need for a suite of finance products in this area.”

It’s win-win all the way around.

While many people may feel there is a stigma around higher rate funding, I would argue the only stigma is in not being able to communicate clearly how important that funding is to the end user. Once the hurdle of understanding is surpassed I have personally never seen a deal turned away, everyone in the supply chain understands it and is ready to close the deal and at the end of the day, the more deals that close, the better it is for all.

www.canadianequipmentfinance.com | Original article source | June 2013

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