3 C’s of Credit: Getting to “You’re Approved!”
Whether you’re seeking your first trailer lease, want to expand an existing lease, or want to borrow from a lender, focusing on the 3 C’s of credit can help you qualify.
Big or small, many trucking companies have a common goal: to grow business. But how is that possible when capital lending is tight? Some creditors aren’t eager to give you a chance. And without more equipment, you get growing pains, not a growing business.
Equipment lessors, like XTRA Lease, weigh several factors in considering credit risk. So do banks. The factors aren’t identical, but there are commonalities.
Knowing how the 3 C’s of credit are weighed will increase your chance of getting to “You’re approved!”
3 C’s of credit #1: Capital
Looking for a term lease?
To qualify, you need enough of your own liquid capital on hand for a creditor to feel comfortable taking a risk on you. It’s probably the easiest factor to assess. Basically, it’s determining how much skin you can put in the game.
XTRA Lease requires customers to prove their financial capacity for making their lease payments. For long-term trailer leases, XTRA Lease evaluates each applicant’s financial statements and trade references to determine cash flow and the predictability of future financial performance.
Simply put, if you don’t have money and a history of revenue and earnings, getting a term lease isn’t easy.
For first-time trailer renters, XTRA Lease makes a decision about whether you can pay on time over the next 120 days. We look at credit scores and factors such as:
- How long have you been in business?
- How are you paying other creditors? Will a check of your trade references show they’re getting paid on time?
If it all checks out, you’re likely to get approval to rent.
3 C’s of credit #2: Character
“Character is one of the most important factors that goes into evaluating credit approval for a trailer lease,” says Mike Heggs, Director of Customer Financial Services at XTRA Lease. But it’s also the hardest to gauge. After all, how do you measure the trustworthiness of someone you’ve just met?
We think the best way is through personal interaction. We personally visit companies that want large equipment leases to get a feel for the company’s character.
“Based on information a company provides in their credit application, I’ll have several questions for them,” he says. “Hopefully, they’ll answer the questions without me having to ask them. It shows how forthcoming they are with information about their company. Creditors need applicants to be up front. On the other hand, if I have to dig for answers, that also reveals something about the applicant’s character.”
Character really shows when a company responds to an issue or their cash flow is tight.
“Every company has ups and downs,” Heggs says. “How does someone handle him- or herself when business is rough? It’s the little things you pick up during this process that help you assess character.”
For example, if a customer is having trouble paying bills, how does he respond to questions? Or how does she respond when there’s a disagreement? That character-revealing response could affect that customer's ability to secure credit in the future.
3 C’s of credit #3: Capacity
Capacity is a customer’s ability to do what they're in business for. In other words, how capable is the company at running a trucking operation?
XTRA Lease looks at such factors as
- What kind of a fleet do you run? What’s the condition of the fleet? How does the yard look?
- How’s the business environment? Are the phones ringing? How does the facility operate? Are you physically in a good operating position to meet the needs of your business?
- What’s your business model like? What’s your customer base? Do one or two customers provide most of your revenue?
There’s no strict science for measuring capacity, but it’s a contributor that’s going to be evaluated when you try to lease trailers or get financing.
What’s not a factor?
There are two credit-related C’s that XTRA Lease doesn’t consider in evaluating credit potential: conditions and collateral.
Unlike many lenders and lessors, we don’t consider the economy when assessing risk.
“Our company, through good times and bad, has never modified our risk assessment criteria based on what’s happening with the economy,” says Heggs. “We’ve always been consistent in how we evaluate a company’s risk.”
“We never base a company’s risk assessment on collateral,” says Heggs. “We look at the fundamentals. If a company can support their case with collateral, it may help. But we don’t award a deal based on collateral.”
Basically, XTRA Lease determines whether a company applying for credit is worth what it says it’s worth by examining financial statements and reviewing fundamentals: company structure, fleet data, customer base, operations, etc.
The biggest challenge many trucking companies face is when they reach a certain revenue level. Managing the company becomes much more complicated and owners who want to continue to grow their business need professional financial advice.
“If you’re at that point and are still trying to do everything in-house, most lenders will be cautious in assessing risk,” Heggs says. “That’s the time to have a solid relationship with your bank. Make arrangements for cash-flow financing. Hire an accountant to advise you on your business’s finances.”
Leasing: financials are key to approval
For customers who want trailers on a long-term lease, the most important factor is financial capacity. And it's important to provide financial documents that are prepared by an outside accounting firm.
“If you want someone to take a risk on your business and you don’t have an outside accounting firm, you may limit a lender’s willingness to provide you credit,” says Heggs.
Renting: prompt payment is key to approval
For a small, growing company that wants to rent trailers, the most important factor is paying on time. If you have a history of prompt payments, your chances of being approved to rent increase greatly.
Going forward, as you continue to pay on time, your credit grows with XTRA Lease.
“Part of what we do is grow with the customer,” says Heggs. “We’re thorough and do a detailed evaluation. We want to help our customers succeed.”
This post illustrates what XTRA Lease does to assign credit limits for rental and lease trailers. Although we touch on general aspects of how creditors assess risk-worthiness, we do not speak for the trailer leasing industry in general or for any other trailer lessor.
There’s a lot of information online and in print about business credit. The U.S. Small Business Administration is a good place to start if you want to learn more about business credit.