Emerging Markets; Equipment Finance Basics
Financing equipment in any emerging market has its intricacies. In any industry that does not have mass adoption, you can assume that it will have less lending support. To be clear, when the lenders have less access to capital, they will have a higher barrier to entry lending to you/your business.
The most familiar borrowing will be a car loan or mortgage, I know more about the latter, so I will focus this example with the mortgage world. If you approach a bank to borrow some funds to buy a new house, the steps are rather understood, even expected. There will be an application that will cover where you work, they will want to know how much you make, they will review your credit, and they will want to see what you are buying and how much you are putting down. After this initial review, they will dive into the details, an appraisal on the house, a confirmation of your job and salary. While this is a very high-level overview, it will outline many of the essential items needed.
When we transition to business to business lending, the same basics and more should be expected with some critical differences.
Business lending will require: who is borrowing (including directors or owners), how they make money (revenue basics), what are they buying (appraisal will be needed), current debt load (financials), and how long have they been in business. These facts will be the basics, like the example above, and they will dig in to verify. So it is safe to assume more questions will be asked.
When a startup is involved, everything gets more complicated (not impossible), When a company has not yet made a profit, the risk of them failing (not being able to pay) goes up exponentially. So we work with specific lenders who can handle this kind of risk. The rates may be higher; this is coupled with additional requests, as there will not be historical financials to back this up, the lenders will need to see a business plan. There will be more questions about the team to better asses risk, i.e. if it is everyone’s first time running a business like this, then the risk is higher. Also, lenders who look at startup deals will typically ask for additional security like personal guarantees and/or larger down payments.
Now to dive one layer deeper, we work extensively in emerging markets, markets that can be notoriously difficult to lend to or market that will not have a flood of banks fighting for the business. When there is scarcity of lending options or markets that may have more volatility (risk), the rates and requirements can be higher, too be expected. After all, a lender could underwrite a shopping mall to a developer and collect “B” rates in the 8–9% range. If you are considering an emerging market as a lender, you would be expecting a premium for the additional risk. When more money/options arrive, the rates will fall.
So to summarize, emerging market financing is possible, and best practices are to understand the lending environment, anticipate the lender’s questions, plan and prepare the answers to potential questions and execute your plan with great success!
With all of the above under consideration, next, we should discuss the pros of debt vs equity. We will dive into that in the next article with Rebecca Armitage
