Chapter 1
Chapter 1
Chapter 1
Richard M. Contino
Equipment Leasing and Financing: A Product Sales and Business Profit Strategy
10 9 8 7 6 5 4 3 2 1
Keywords
equipment financing; equipment leasing; leasing; financing; product
marketing; product sales; product financing; conditional sales agreements;
lease agreements; product financing agreements; product sale financing;
product sale leasing
Contents
Introduction������������������������������������������������������������������������������������������xi
Appendix��������������������������������������������������������������������������������������������167
About the Author��������������������������������������������������������������������������������199
Index�������������������������������������������������������������������������������������������������201
Introduction
This book will address how companies that sell equipment and other
products can set up their own innovative leasing and financing opera-
tion to increase product sales and add a solid new business profit center.
Historically, developing an in-house product vendor financing activity
was a major and costly undertaking, but, today, doing so can be readily
and cost-effectively done by a product vendor of virtually any size using
market available, state-of-the-art software and outsourced services. It is
a known fact that product seller customers prefer financing offered by
product sellers, believing it will not only be the most favorable financ-
ing arrangement available, but will also involve less financing red tape. A
belief often true.
Industry data shows that the need for equipment and other product
financing has evolved over the past few decades to the point where now
nine out of 10 U.S. companies use leasing or other forms of third-party
financing to acquire the equipment or other products they need. At the
time of this writing, the latest available annual business statistics (2017)
from the Equipment Leasing and Finance Foundation show that busi-
nesses acquired 1.7 trillion U.S. dollars of equipment and software, 60
percent of which, or over one trillion U.S. dollars, was financed through
leasing, 48 percent of this total, the most common method; followed by
lines of credit, 9 percent of this total, and secured loans, 8 percent of this
total. For market-aggressive companies offering products for sale, having
an available in-house customer product leasing and financing program
can dramatically increase their ability to close product sales.
Virtually, all but a small percentage of product vendors who use
financing to support and increase product sales rely on arrangements with
third-party independent or bank-affiliated leasing companies to provide
customer financing. These third-party arrangements, often provided on
a non-disclosed (private label) basis under the name, or a name deriva-
tion, of the product seller, can be very profitable for the leasing compa-
nies. Generally, however, these third-party programs are not as flexible as
xii Introduction
settled on, they require little, if any, re-visiting. The lease document is
discussed in greater detail in Chapter 9.
In the early years of the leasing and financing business, most indepen-
dent and bank-affiliated leasing and financing companies approached
potential product users directly with their own sales personnel, rather
than working with product vendors, to find financing opportunities, an
effort that required a significant sales staff and a time-consuming effort.
Product Leasing and Financing 5
offered and done by the product vendor, with all documents and market-
ing material, and even phone calls and e-mails, issued under the product
vendor’s name. Making matters even more challenging in using third-
party financing companies is the fact that a few insert fine-print decep-
tive, or gotcha, provisions in their financing documents, such as onerous
lease renewal provisions that automatically extend the financing term for
long periods if the lessee fails to notify the lessor within a very small time-
frame of its desire to return the equipment at lease end. This then disrupts
the customer relationship. And, finally, some have distinct limitations on
the type of customer contracts they will provide financing for, such as not
offering financing for bundled equipment and services contracts or con-
tracts that charge based on product use. The result is that a product ven-
dor often does not have available customer financing that fits its market
needs and sales strategies in the current highly competitive marketplace.
Advantages of an In-House
Product Financing Operation
There are a number of obvious advantages for a product vendor in offer-
ing in-house financing in connection with its product sales activity and a
few less obvious ones.
available cash or bank lines of credit for a product acquisition, making the
acquisition decision easier and faster.
As also already suggested, leasing and financing profits can add to profits
from product sales, sometimes dramatically.
Its a well-known sales fact that once a company has developed a customer
relationship, such as through a long-term and ongoing product sales or
Product Leasing and Financing 9
Document Control
Credit Risks
Getting used equipment back at the end of a lease term or earlier because,
for example, of a financing contract default, can jeopardize financing
profits, particularly if the product drops significantly in value in the
used marketplace and the product vendor was anticipating, as part of its
financing profit, proceeds from the sale or re-lease of the product or as
collateral to offset any customer credit risk for any shortfall resulting from
a contract payment default. In this situation, product vendors with their
inherent product knowledge, particularly if they have product refurbish-
ment capabilities and existing customer base contacts, can offset this risk
through secondary market product marketing, something independent
leasing companies without similar capabilities can rarely do.
Summary
The establishment of an in-house leasing activity by a product vendor
can not only increase product sales, but can also add a new profit center,
something that historically has been difficult and expensive to do, but
today, it is something that should now be a viable consideration for any
aggressive product vendor.
Index
alternative depreciation system role of market trends in, 61–62
(ADS), 129 role of repeat customer, 62–63
automatic stay, 160 usefulness of credit agencies, 61
credit risk, 10, 16, 58, 62
bankruptcy rule customer financing, xi, 29
and automatic stay, 160
Bankruptcy Code concepts, 158 debt financing, 2
and Bankruptcy Code, 157, 158, division, 51
160, 163
Chapter 11, reorganization, equipment casualty occurrence,
159–160 22–23
Chapter 7, liquidation, 158–159 equipment financing, xi, 1, 9, 13,
chapter proceedings, 158 16, 18, 37, 39, 44, 59, 72,
equipment lease 141, 143, 157. See also
assumption of lease, 161–162, bankruptcy rule; conditional
164 sales agreement; financing,
period required for assumption in-house; lease financing
or rejection of lease, 162–163 advantage of, 2
rejection of lease, 162–164 advantages of in-house, 7–9
for aircraft, railroad rolling stock vs. alternate financing, 2
and vessels, 163–164 challenges to in-house, 12, 16
importance of, 157 as a concept, 1, 13
proceedings types, 157–158 disadvantages of in-house, 10
and true lease, 164–165 and financing profit, 19
business financing. See lease financing in-house vs. third-party, 3, 6–7
issues with, xi–xii, 9
capital equipment, 40 need for, 11–12
Cisco System Capital Corporation, xii objectives of, 39–40
Cisco Systems Inc., xii, 3 and repeat customers, 17–18
conditional sales agreement, 2, 5, 23, and vendor programs, 5, 28
45, 63, 93, 95, 138 Equipment Leasing and Finance
drafting of, 113 Foundation, xi
corporation, 49–50 equipment leasing, xi, 5, 7, 9, 13,
credit process 20, 37, 59, 72, 161. See also
components in, 58 bankruptcy rule; financing,
credit evaluation, 59–61 in-house; lease financing
financing type, 63 challenges to, 12, 16
importance of automation in, issues with, xi–xii
65–66 and repeat customers, 17–18, 62
importance of credit expert in, tax benefits, 20
58–59, 68–69 and vendor programs, 5, 28
202 Index