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What Is the Underwriting Process for Equipment Leasing?

Equipment leasing, a type of financing companies can use to acquire new equipment, involves a series of steps, from picking the instrument you want to getting a manufacturer quote to finalizing a lease agreement and submitting a first payment.

One of the most crucial steps in equipment leasing is underwriting, a process through which the leasing company you’re working with assesses the financial health of your company, and determines if there is any risk of leasing or lending to your company. It ultimately dictates whether you will get a final approval for the equipment lease or not.

In this article, we will review what underwriting is, who performs it, where it fits into the equipment leasing process, and what documents you will need to provide.

What is Underwriting?

It is important for any leasing company to understand the potential financial risk they might be taking on by leasing equipment to another company. Underwriting is the process through which that level of risk is determined. 

It involves in-depth research on the applicant’s financials, credit, and other relevant, verifiable information, research that helps determine if the degree of risk leasing to your business is acceptable. Without underwriting, the complications associated with taking on financial risk, such as defaulting, can hurt both the lessee and the lessor or borrower and lender. 

In the equipment leasing industry, the underwriting process also involves the assessment of the equipment you want to lease, together with an analysis of the company’s financials and credit. 

Underwriting isn’t only used in equipment leasing. It is an essential process financial institutions like commercial banks, investment houses, and insurance companies use to determine the risks of lending money to a potential borrower or providing insurance.

The underwriting analysis itself is not too different between industries and financing options, as the end goal is the same: determine the degree of risk a company will take on in order to work with you. Whether you’re interested in a lease or an equipment loan, you’ll be required to provide very similar documentation to an underwriting team.

Who Performs Underwriting?

This may be obvious, but underwriters perform underwriting; finance professionals that specialize in the process of underwriting and perform due diligence on a company’s financial information, conducting any necessary research and document review in order to provide financing to another company.

While underwriting services can be provided by commercial banks and other institutions, the leasing company you work with will typically perform the underwriting internally. As the lessor or originator of the lease, they will rely on their lease underwriters to perform underwriting duties.

They 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.

What Stage Does Underwriting Happen During the Equipment Leasing Process?

The first stage in the equipment leasing process is selecting which pieces of equipment you want to lease. It is important to first test the equipment by doing a demo with the manufacturer to determine whether or not it will meet your needs. After determining whether or not the equipment is what you need, you will have to get a quote from the manufacturer that includes all necessary parts and software for the instrument.

When these steps are completed, you will be able to apply for the equipment leasing program. Once your application has been processed, the underwriting process begins.

However, just because you don’t have an instrument quote from a manufacturer doesn’t mean you can’t reach out to the leasing company you’ve chosen to work with.

For example, it often helps to have an initial conversation with someone from the Excedr team. 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 can develop a stronger understanding of leasing in general, as well as our lease structure, length, lease payments, and optional services.

What Do You Need To Provide?

When it’s time to perform underwriting, it is important to have all the necessary documents available. Document requirements can vary based on the different ways companies use to fund their operations, however, the documentation every underwriter typically requires includes bank statements, financials, and tax returns.

Depending on the findings from the document analysis, the underwriter might request follow-up documents in support of the original documents in order to make a final decision. Additional documents can involve funding round information, your company’s capitalization table, contract revenue agreements, and more.

Supplemental documents can help the underwriters understand the individual and special components of a particular business that might not be apparent based on the standard documents initially provided. 

Because it can sometimes be hard to tell which documents will be needed to properly perform an analysis of the applicant prior to the underwriting, supplemental documentation requirements will come to light after the initial analysis. Let’s go over what you need to provide in more detail.

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.

How Long Does The Process Take?

How long underwriting takes will vary depending on who is performing the assessment, who is being assessed, the type of equipment being leased, and the number of instruments requested. 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 take anywhere from 3 days to a couple of weeks, depending on the size of the capital allocation and whether additional documents are required. In general, however, our underwriting process is quick compared to underwriting performed by traditional financial institutions.

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 “idiosyncrasies.”

Does the Type of Lease 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, 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.

Be Prepared 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.

Need to Lease Lab Equipment?

Excedr can help. You can lease 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. 

Excedr’s equipment leasing program is unique to the life sciences industry,. Our underwriting process is specially geared for biotechs at every stage.