What Is the Underwriting Process for Equipment Leasing?

What Is the Underwriting Process for Equipment Leasing?

You'll need to go through several steps to lease new equipment, including equipment selection, obtaining a manufacturer quote, finalizing the lease agreement, and submitting an initial payment.

Underwriting is a crucial step in the process, where the leasing company assesses the financial health of the company to determine any associated risks in lending or leasing to it. This step, performed by an underwriter, will ultimately decide if the equipment lease will obtain final approval. This article details what underwriting is, who conducts it, where it fits in the equipment leasing process, and the necessary documents you need to provide.

While you may already know which make and model you'd like to lease, you might not know what the underwriting process will involve. We're here to demistify the process and give you the knowledge you need to have a smooth underwriting upfront. Read on to learn what underwriting is, how it works, and what you'll be asked to provide to your potential lessor.

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What Is Underwriting?

Underwriting refers to the process of evaluating and assessing the risk of lending money or extending credit to an individual or organization. This can include financial products such as loans, bonds, insurance policies, etc.

In the context of lending, underwriting involves analyzing a borrower’s creditworthiness, including their credit history, income, and any financial obligations they may have. This evaluation can be used to determine the likelihood that they will be able to repay the loan. The underwriter will also evaluate the collateral being offered, if any, and may set terms such as the interest rate and repayment schedule.

In the context of insurance (e.g., health insurance), underwriting involves evaluating the risk of insuring an individual or organization based on factors such as age, health status, and prior insurance claims. The underwriter will determine the premium the insured will pay and may set conditions or exclusions to the policy.

Underwriting is an integral part of financial risk management, as it helps to ensure that lenders and insurers can adequately assess and “price” risk, making sound decisions about which risks to accept and which to decline.

What Role Does Underwriting Play in Equipment Leasing?

Underwriting in equipment leasing is the process of evaluating the creditworthiness of a potential lessee, as well as the equipment being leased, to determine whether the lessor should extend financing or leasing terms to the lessee.

During the underwriting process, the lessor will typically gather information about the lessee’s credit history, financial statements, and business operations to assess the risk of default. This information may be obtained through a credit application or other financial documents the lessee provides. The lessor will also evaluate the equipment being leased, including its age, condition, and expected useful life, to ensure that it meets the lessor’s standards for quality and value.

Based on this information, the lessor will determine whether to approve the lease and what terms and conditions should be offered, such as the lease rate, length of the lease term, and any required security or collateral.

Who Performs Underwriting?

Underwriting can be performed by a variety of financial professionals, depending on the type of financial product involved. Some common examples of underwriters include:

  1. Lenders: Banks, credit unions, and other financial institutions that lend money to individuals and businesses often have underwriters on staff to evaluate loan applications and determine the creditworthiness of the borrower.
  2. Insurance companies: Underwriters at insurance companies evaluate applications for insurance coverage and determine the risk associated with insuring a particular individual or organization.
  3. Investment banks: In the context of securities offerings, investment banks may act as underwriters, evaluating the risks and potential returns of a particular security and helping to market it to investors.
  4. Bond issuers: When a company or government entity issues bonds, they may work with underwriters to assess the risks associated with the bond issuance and determine the interest rate and other terms.
  5. Independent underwriting firms: Some firms specialize in underwriting services, providing independent analysis and risk assessment to help lenders and investors make informed decisions about financial products.

While underwriting services can be provided by commercial banks and other institutions, in the framework of equipment leasing, the originator of the lease (lessor) may perform the underwriting internally using lease underwriters to perform underwriting duties. . This can be ideal as it can speed up the approval process, getting you an answer sooner.

Underwriters will be responsible for the review and analysis of your company, but most likely will not work alone in the process. Considering that underwriting can include reviewing legal documents, the legal department of the lessor will need to be involved as well.

The Underwriting Process

The underwriting process can vary depending on the type of financial product involved and the specific policies and procedures of the lender or underwriting institution. However, here is a general step-by-step overview of the underwriting process:

  1. Application: The first step in the underwriting process is for the borrower or applicant to complete an application, providing information about their financial history, creditworthiness, and the purpose of the loan or financial product.
  2. Documentation: The underwriter will then review the documentation provided by the borrower, including financial statements and other relevant documents, to verify the accuracy of the application and assess the risk associated with the loan or financial product.
  3. Credit Check: The underwriter will also perform a credit check on the borrower to evaluate their credit score and history, which will help determine the borrower’s likelihood of repaying the loan or financial product.
  4. Risk Assessment: Based on the documentation and credit check, the underwriter will assess the risk associated with the loan or financial product, taking into account factors such as the borrower’s income, debt-to-income ratio, and other financial obligations.
  5. Collateral Evaluation: If the loan is secured, the underwriter will evaluate the collateral being offered by the borrower, such as a home or car, to determine its value and assess the risk associated with the loan.
  6. Decision: Based on the risk assessment and collateral evaluation, the underwriter will decide whether to approve the loan or financial product and, if so, what terms and conditions to offer, such as the interest rate and repayment schedule.
  7. Closing: If the loan or financial product is approved, the borrower and lender will finalize the agreement and complete the closing process, typically involving signing a contract and disbursing funds to the borrower.

Following these steps, the underwriting process is designed to help lenders and investors assess risk and make thoughtful and accurate decisions about extending credit or investing in securities.

The Underwriting Process for Equipment Leasing

The underwriting process for an equipment lease is generally similar to the process for other types of loans or credit products, but there may be some differences in the underwriter’s specific requirements and evaluation criteria.

Here are some of the factors the underwriter might review and consider:

  1. Creditworthiness: The underwriter will typically review the lessee’s credit history and financial stability, as well as any other parties that may be guaranteeing or co-signing the lease.
  2. Business history: The underwriter will consider the length of time the lessee has been in business, their industry or sector, and other factors related to their ability to make timely payments on the lease.
  3. Equipment details: The underwriter will evaluate the type and value of the equipment being leased, its expected useful life, and potential resale value. This will help the underwriter assess the risk associated with the lease and determine appropriate lease terms and pricing.
  4. Financial statements: Similar to the underwriting of other financial products, the underwriter will typically request financial statements from the lessee. However, this will include income statements and balance sheets that can be used to assess the lessee’s financial strength and ability to make payments on the lease.
  5. Down payment or collateral: Depending on the leasing company and lease terms, the lessee may be required to provide a down payment or some form of collateral as a type of security in case the lessee cannot make the lease payments.

While this should give you a good idea of how underwriting equipment leases work, remember that the underwriting process in this context will ultimately depend on the specific requirements of the lender or leasing company, as well as the type and value of the equipment being leased.

Our team can help you with any questions you may have about lease transactions in general, how we differ as a leasing company from our competitors, and how we can help you based on your equipment and business needs. By reading up on the equipment leasing process and speaking with us directly, you’ll have a better understanding of leasing in general, as well as our lease structure, length, lease payments, and optional services.

What Do You Need To Provide?

As mentioned, submitting all the necessary documents is critical to the underwriter’s ability to perform underwriting. What you need to submit can vary depending on how a potential borrower funds its operations, but common documentation includes bank statements, financials, and tax returns.

The underwriter may request follow-up documents based on their analysis and may need supplemental documents, such as funding round information, contract revenue agreements, and more, to understand specific components of the business. Supplemental documentation requirements can arise after the initial analysis.

Balance Sheet

Companies are required to provide their balance sheet during underwriting because it gives the leasing company a comprehensive picture of the applicant as a whole. This includes how many assets the business has on its books, what its liabilities are, and how they fund their business. Together, this information gives a leasing company a better idea of the risk or lack of risk they’d be taking on leasing to the applicant company.

Income Statements

A company will provide its income statements to the underwriter so that they may better understand the the day-to-day operations of the business: where the business’s money is going and how much money they are making.

Knowing how a company allocates their money and whether their production is sustainable, in combination with the company information provided through the balance sheet, will help an underwriter understand the business even more. This makes the risks of lending or leasing to the company even clearer.

Cash Flow Statements

Although Excedr does not typically require clients going through our underwriting process to provide cash flow statements, there may be times when your business will need to show an underwriter all their audited financial statements to certain lenders. This will include cash flow statements.

Usually, this will happen when an applicant is looking to borrow a lot of money from a lender, and has to disclose all financials as part of the underwriting process. Additionally, the US government requires public companies to disclose all financial statements as part of the auditing process. Because Excedr works with a lot of startups, we do not require them to provide audited financial statements.

Tax Returns

Tax returns are requested for underwriting because they are official documents filed with the government. Underwriters can compare tax returns to financials and, most of the time, if a company doesn’t correctly file their taxes, it’s a sign there’s something going.

In other words, the risk of lending or leasing to a company that doesn’t file their taxes properly is generally higher than the risk of lending or leasing to companies that do file their taxes properly.

Supplemental Documents

From your company’s capitalization table to contract revenue agreements to fundraising or loan documents, underwriters might require that you provide additional information. Supplemental documents can show a company’s obligations to other shareholders or lenders, allowing underwriters to get a deeper understanding of your business and its financial health when typical documents aren’t completely clear.

Instrument Quotes

It is also crucial to choose the appropriate pieces of equipment that meet your requirements, and to get an instrument quote from the manufacturer whose equipment you’re interested in leasing. We recommend arranging for a demo with the manufacturer to evaluate the equipment’s suitability. Once you have confirmed that the equipment meets your specifications, obtain a comprehensive quote from the manufacturer, which includes all required parts and software for the instrument. This will help the underwriter perform their underwriting duties.

How Long Does Underwriting Take?

How long underwriting takes will vary depending on several factors: the complexity and type of the loan or application, the type of financial product involved, the underwriter(s) performing the assessment, and the company being assessed. For example, an equipment lease will involve the evaluation of the type of equipment being leased and the number of instruments requested, while an insurance underwrite will involve the age and health of the individual.

Another example is a simple credit card application, which may be approved or declined within a few minutes. On the other hand, a mortgage application may require weeks of underwriting review, and include an appraisal of the property and a more thorough evaluation of the borrower’s financial history and creditworthiness.

Similarly, the underwriting process for a bond offering or other securities issuance can be quite lengthy, involving extensive due diligence and documentation reviews, as well as coordination with legal and financial advisors.

Simply put, the length of underwriting will depend on the specific requirements of the financial product, as well as the level of due diligence and risk assessment required by the lender or underwriter.

In the context of equipment leasing, when there appears to be little risk in leasing to a company, the underwriting process can be quite short. However, if it appears there is a large amount of risk involved in leasing to the company, then the underwriting process may take longer. Although a company can be relatively risk free, the process might still take longer due to their size of operations and the complexity of the underwrite.

At Excedr, our underwriting process can be extremely quick compared to other organizations. It can take as few as 3 to 7 days to complete underwriting. However, it will ultimately depend on the size of the capital allocation and whether additional documents are required. Our insight and knowledge of the life sciences industry, along with years of experience with various companies in the industry, helps us better understand biotechs and their needs.

Do Different Types of Leases Impact Underwriting?

Yes, the type of lease you’re interested in can impact underwriting diligence. However, it does not impact the level of underwriting diligence. Whether the lease is classified as a finance or operating lease, the lessor must verify that the lessee’s financials are sufficient to cover the payments for the duration of the lease. The impact is simply due to the differences in lease classification.

Under an operating lease, the asset is owned by the lessor for the duration of the lease, with no obligation to transfer ownership after the term has ended. In this sense, an operating lease is like renting. No economic risks are shared between the lessee and lessor.

In contrast, under a finance lease, or capital lease, characteristics of ownership are placed with the lessee during the lease, and a guarantee that they can and/or will purchase the instrument after the lease has ended and take on full ownership is included in the lease agreement. In this way, a finance lease is like purchasing or taking out a loan—the economic risks and benefits are shared between the lessor and lessee.

Because the leases are structured differently, the focus of the underwriting changes. Under a finance lease, the lessee is responsible for the equipment’s maintenance, while under an operating lease, the lessor usually takes on the responsibility of equipment maintenance. The level of risk has to be assessed accordingly to ownership of responsibilities under different lease structures.

How Can You Prepare for Underwriting?

Underwriting can feel like a daunting part of equipment financing or leasing. Although it goes on in the background, it’s important to understand what it is, how it fits into the leasing process, and what sort of documents you will need to provide the leasing company or lender you’re working with.

Being prepared for underwriting can help speed up the time between applying for a lease to getting the equipment you need installed and running in your laboratory. Some ways you can ensure you have an easy and prompt underwriting include:

Gather All the Documentation You’ll Need

The best way to keep your company’s underwriting on track is to have all your financial statements and documents organized before you apply for an equipment loan or lease. Putting together a physical and digital file of your documents that you can send over for the underwriting can make it much easier for underwriters to finish your loan or lease application quickly.

Avoid Making Any Impactful Financial Changes

Any major financial changes and spending can cause problems during the underwriting process. For example, you might consider other financing options while you’re going through underwriting. By getting a new line of credit or taking out a loan, you risk interrupting the process and requiring the underwriter to essentially start the process all over.

In addition, you’ll want to avoid making large purchases or any sort of financial transactions that negatively and significantly impact your financials. It’s important that the underwriter is able to review your financial position in its most recent state. Otherwise, the actual risk will not be reflected in the underwriting.

Keep Your Books Up To Date & Airtight

Some companies start the underwriting process and don’t have financials ready for the month that just passed. This is often required by underwriters, so it’s important to make sure your bookkeeping is up to date and mistake free.

Include Notes & Explanations About Anything Abnormal

When you submit your company finances, it can help to include notes and explanations for anything that might stick out in your financial statements.

Respond To Requests As Soon As Possible

During underwriting, your would-be lessor or lender may need to contact you to request supplemental documents. By responding to any requests quickly, you can help the underwriter finish the process faster.

The Speed of Underwriting Is a Huge Factor

Underwriting is an integral part of the equipment leasing process, as it helps leasing companies and lenders evaluate the risk associated with a particular equipment lease and determine appropriate lease terms and pricing. During the underwriting process, the leasing company or lender will evaluate the lessee’s creditworthiness and financial stability, the type and value of the equipment being leased, and other factors related to the lease.

The underwriting process can involve reviewing financial statements, credit reports, and other documentation and verifying information with third parties.

The length of time it takes to complete the underwriting process for an equipment lease can vary depending on a range of factors, including the complexity of the lease, the number of parties involved, and the specific requirements of the leasing company or lender.

In some cases, underwriting can be completed in a matter of days or weeks, while in other cases, it may take several weeks or even months to complete the process. Excedr does its best to complete underwriting as quickly as possible—usually, a couple of days.

It is important to allow enough time for the underwriting process when seeking an equipment lease, as this can help ensure that the lease is structured appropriately and that all parties are comfortable with the terms of the agreement.

If you’re interested in leasing, get the exact equipment you need from the manufacturer of your choice and get the equipment into your lab more quickly than other financing routes thanks to our quick and simple underwriting process when you lease with Excedr.

That said, we can’t work with every type of company, nor can we lease every type of equipment. Our leasing program specializes in lab equipment for R&D and scientific commercialization, and is designed to help companies the life sciences industry. If this is you, reach out and let us know how we can help.