A lender underwrites an equipment lease by checking four things. The business must be able to pay from its cash flow. The equipment must hold its value until the lease ends. The supplier and the price must be real. And no one else may have a claim on the asset. This is the lender's credit review, not lease accounting.
Can the business pay?
Equipment finance is repaid from the cash the equipment helps to earn, so start with cash flow.
Take the cash the business makes before debt payments. Divide it by all its yearly debt payments, including the new lease. The result is the debt service cover ratio, or DSCR. Above 1 means the cash covers the payments, but lenders want a margin, and your policy sets it. Our DSCR calculator does the sum.
Then check where that cash figure came from. Look at two years of accounts, the latest management accounts and the bank statements. Check how long the business has traded and who owns it. Add the credit reports and a list of the debts the business has now. If the owner will guarantee the lease, look at the owner's position too.
Seasonal sales matter too. A business that earns most of its cash in four months may need payments that follow the same pattern.
What is the equipment worth?
This is what makes equipment finance different from a loan with no asset. If the lessee stops paying, you need to be able to take the equipment and sell it.
- Type: some kit holds its value, like trucks and common machine tools. Some loses it fast, like computers and phones.
- Age and condition: new or used, and for used, the hours or miles and the service history.
- Identity: the make, model and serial number, so you can tell it from any other.
- Market: is there a place to resell it, and how many buyers are there?
- Life: how long will it work, and will a newer model make it obsolete?
- Location: can it be moved? If it is bolted to a building, who owns the building?
The term of the lease should sit well inside the working life of the equipment. Also decide what you expect it to be worth at the end. That is the residual value. A high guess lowers the payments today and raises your risk later.
Can you trust the supplier and the price?
Fake invoices are a real risk in equipment finance. A borrower and a supplier can agree on an inflated price. Then the lender lends more than the kit is worth.
Check that the supplier exists and that its bank details belong to it. Check that the invoice matches the quote and the order. Look for two or three market prices, such as dealer listings, to see if the price is fair. Ask if the supplier is linked to the borrower. Do not pay out until the lessee has signed a note to confirm the kit arrived and works.
Who else has a claim?
Make sure nobody else has a claim on the asset. In the US that means a lien search, often a UCC search. In the UK, look at the charges on the company at Companies House, and for vehicles run an HPI check. The same serial number financed at two lenders is a known type of fraud. So search for the serial number if you can.
Check the insurance as well. The lessee should insure the equipment, with you named on the policy.
Red flags
- A supplier that is owned by, or run by a relative of, the borrower.
- A price well above market for the same kit.
- Used equipment with no serial numbers, or photos that do not show them.
- Payment requested to an account that is not the supplier's.
- A new company asking for a large amount for special kit.
- A lease term longer than the working life of the equipment.
- Thin cover ratios, or sales that depend on one customer.
A worked example
This is an example with made-up numbers. It is not a real lessee.
A business asks for £128,400 to buy a used machine, paid back over 36 months. The payment is £3,860 a month, which is £46,320 a year. The business already pays £31,500 a year on other debts. So its total yearly payments would be £77,820.
Its cash before debt payments is £118,900 a year. Divide £118,900 by £77,820 and the DSCR is about 1.53. That is a fair margin, but the credit team compares it with the policy.
Next comes the price check. Two dealer listings for similar machines are £111,000 and £115,000. The invoice is about 12% to 16% above them. That is not proof of a problem, because a machine can be sold with extras. So the credit team asks for the specification and the serial number. A person decides if the answer explains the gap.
What can and cannot be automated
A lot of the routine work can be done by software. It can read the accounts and the bank statements into figures and work out the DSCR. It can compare the invoice with the application, the quote and the supplier's details. It can find the serial number in the papers and ask for it if it is missing. It can also chase the delivery note, which often arrives late.
It cannot decide if the price is fair for a machine that is hard to compare. It cannot judge how a market for used kit will look in three years. And it cannot decide if you trust the supplier. Those calls belong to the credit team.
Klarefi is the intake step that fits before the credit review. It reads what the lessee and the supplier send, asks for what is missing and links each number to its source. It does not score or decide.
Use the document checklist as a base for the file. Our guide to loan software covers the wider process.