Obtaining a Bank Line Part 1 – Typical Facility Structures
For many independent equipment leasing companies, qualifying for a bank line of credit to fund balance sheet portfolio is a great way to build company value and long-term income at a relatively low cost of capital. However, going through the process of securing a bank facility for the first time can be an overwhelming process. The goal of this article series will be to help set proper expectations on what a bank facility might look like structurally, the data a bank will likely require from a prospective borrower to make their credit decision, and the ongoing financial and reporting covenants a bank may require of a borrower.
Banks that lend to equipment leasing companies generally fall into one of two categories; 1) those that view the hard asset equipment as the primary facility collateral, and 2) those that view the lease receivable chattel paper as the primary facility collateral.
Banks that fall into the first group above, tend to be smaller community banks that often know less about the equipment leasing industry, but are looking for solid, profitable businesses with a good collateral base. These facilities are typically structured with a relatively short draw period (6 months), at which point the outstanding balance is flipped into a term loan that amortizes over the weighted average life of the underlying leases, and then you do it all over again. Advances are based on a given percentage (70-90%) of the equipment cost, and facilities usually range in size from $2-10 million. The pros to such a relationship include the fact that the focus on the equipment collateral usually means that they are less focused on historic portfolio performance and may be willing to lend to a leasing company with less portfolio history. However, due to sometimes having a lack of experience with the industry, they may require quite a bit of handholding and guidance to understand the nuances of the accounting, etc.
Banks that fall into the second group above, tend to be specialized lender finance groups within large commercial banks. These groups are very familiar with the space and have well defined programs. These facilities are structured as revolving lines of credit with a monthly borrowing base calculated with an advance rate (70-90%) against the net investment of the eligible assigned leases. The eligibility criteria may vary from bank to bank, but will likely include some aging limitations, concentration limits on multiple factors, etc., and facility sizes are typically $10-20 million and up. These institutions are primarily focused on underwriting to the borrower’s historic portfolio performance, so generally expect to see a solid operating/portfolio history and substantial data to back this up (more on that next time).
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Justin Vogel has been in commercial banking for 20+ years and financing equipment leasing companies since 2004. Justin is currently a senior vice president at Bridge Bank, a division of Western Alliance Bank. Justin is responsible for the development of new borrowing relationships, primarily focused on receivables financing. Justin launched the lender finance product for Bridge Bank in 2016 and is also a member of NEFA.