Q: I’m looking to increase the size of my fleet, but cash flow is an issue. I believe fleet financing can help. How can I improve the quality of my credit application to lenders to improve my chances of receiving the funding I need?
– Yaz Irani – Airport Van Rental, Los Angeles
A: The reality is that rental operators, at some point, may need financing for their fleet to ensure their operations continue to grow. It is essential to understand what lenders look for beyond the standard credit application. Most lenders require a full financial package that includes both business and personal tax returns, personal financial statements, as well as business balance sheets and income statements.
Following are a few key details to keep in mind when submitting a package for consideration to a rental fleet inventory finance lender. Armed with this knowledge, you’ll be better equipped to make sound business decisions that not only strengthen your balance sheet but also enhance your business.
- It’s OK to make a profit. A healthy business is a profitable business. Rental operations that lose money year after year are typically examined more closely and questioned by lenders looking at your application package.
Build liquid assets. Liquid assets include cash and assets that can easily be converted to cash. Lenders look closely at a business’s liquid assets, as they can predict the company’s ability to survive short term dips in income. Lenders typically measure and analyze your liquidity using a calculation known as “Current Ratio.”
Current Ratio is defined as the amount of short-term assets you have in comparison to short-term liabilities. Short-term assets are defined as any asset that can be sold and converted to cash or liquidated within 12 months; such as owned inventory and accounts receivables. Short-term liabilities are defined as any liability that must be paid within a 12-month period of time. Examples of short-term liabilities include wages, taxes, credit card payments, etc.
To calculate your Current Ratio, simply add current short-term assets such as cash and accounts receivables. Next, look at the other side of the balance sheet and add up current liabilities and anything you expect to pay within the next year. Then, divide the assets by the liabilities for the current ratio. Your liquidity, or Current Ratio, is considered “good” by most lenders if the ratio is 1:1 or greater. Another way to illustrate this: if your payable accounts are the same or less than your receivables and bank balances, then your ratio is 1:1 or greater.
Cash is king. As Current Ratio suggests, there needs to be a balance between assets and liabilities. It’s tempting to go out and purchase additional fleet when the checking account starts to swell. However, keep in mind the 1:1 ratio when making decisions to leverage cash to purchase inventory. Utilizing inventory financing, in lieu of or in conjunction with cash to purchase additional fleet, can further your ability to grow the business and can actually strengthen your balance sheet, keeping more cash in the business.
Get your house in order. Lenders will also typically request personal financial statements from each person listed on the application for credit. Make sure your personal financial statements are in good order, paying particular attention to your assets.
Show them the money. Understand that it may look good to have a large asset number at the bottom of your Personal Financial Statement, but some conservative lenders may strip away assets that are not tangible. Tangible assets have a physical form and include items such as your home and cash.
Dot the I’s and cross your T’s. Leave your lender with a good impression by ensuring the financial package you submit is accurate, legible and complete.
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Rental insurance experts from Automotive Finance Corporation are happy to answer your business and fleet financing questions to help you grow your car rental operation. Feel free to contact Wayne Yocum directly at firstname.lastname@example.org.