Equipment Leasing and Financing

A Product Sales and Business Profit Center Strategy

Richard M. Contino

• Publisher: Business Expert Press
• Year: 2019
• ISBN:
  9781949991932
• Topic: Business
• Subtopic: Finance
• Index: Business

This book explains how companies that sell equipment and other products can increase product sales and add an additional profit center by establishing their own innovative leasing and financing operation.

Industry data shows that the need for equipment and other product financing has evolved over the past few decades to where now nine out of ten U.S. companies use leasing or other forms of third party financing to acquire the equipment or other products they need. For market-aggressive companies offering products for sale, having an available in-house customer product leasing and financing program as a product marketing strategy can dramatically increase their ability to close product sales.

In the past, establishing an in-house financing activity was difficult and expensive, requiring unique and substantial additional business operational and financing components in addition to an extensive learning curve. This is no longer the case. In recent years, there have been wide-spread market advances surrounding the financing of equipment and other products that enable forward-thinking companies to cost-effectively establish their own in-house product financing activity, using readily available, state-of the-art financing software programs, and third-party back-office services to manage any part of the financing process.

This book will provide a product vendor with the turnkey know how it needs to assess the viability of establishing an in-house equipment financing operation, as well as the various considerations needed to set up and run its own cost-effective and profitable product financing activity.

CHAPTER 1

Product Leasing and Financing : A Marketing Strategy for Product Sellers

Product Financing: A Critical Element
of Product Sales

The financing of equipment in the United States, based on the most recently available market data, exceeds 1 trillion U.S. dollars a year. With this type of market acceptance, there is no doubt that a product vendor having customer equipment and other product financing readily available can be a critical component in securing a product sale. This is particularly true if the financing does not involve much, if any, red tape, is offered in easy-to-understand terms and meets a customer’s tax, accounting, and legal needs.

A Basic Overview of Equipment
and Product Financing

Leasing, a Simple Concept

The leasing of equipment is a well-accepted way for businesses to acquire their needed equipment. A lease is simply a contract where the owner of equipment, the lessor, agrees to let a company in need of the equipment, the lessee, use the equipment for an agreed-upon period, the lease term, and lease payment. At the end of the lease term, the lessee returns the equipment to the lessor. The concept is simple; the lease documents, however, can often be complex and need to be carefully drafted, but once settled on, they require little, if any, re-visiting. The lease document is discussed in greater detail in Chapter 9.

Alternative Financing Structures

In addition to the financing of equipment under a lease arrangement, there are other equipment and product financing arrangements that allow businesses to acquire their needed equipment or other products without having to pay the full product purchase price up-front, discussed in greater detail in Chapter 9. For example, a product acquisition can be financed using a conditional sale arrangement, essentially a form of debt financing, where the product user pays a specific periodic payment, such as monthly, over the financing term, and at the end of the financing term, owns the product free and clear. Interestingly, a conditional sale financing can be set up using a lease agreement by simply giving the lessee the option to purchase the product at the end of the lease term for 1 U.S. dollar. Another example would be when product financing is arranged through what are referred to as managed services or fee-per-use agreements, also discussed in Chapter 9, where equipment along with related services, such as maintenance or repair services, or supplies, such as disposables used with the equipment, are provided for an agreed-upon term and periodic payment.

Offering Financing as a Key In-House Product Marketing Strategy

In-House Financing Can Sell Your Products

In today’s market, product users are looking for favorable, cost-effective ways to finance their needed equipment and other product acquisitions. They often favor financing offered by product vendors, feeling that the arrangements will be on better terms than can be obtained from their banks or from independent leasing or financing companies, and, generally, they are correct. Clearly, product vendors with readily available in-house financing for products they sell have a distinct marketing advantage over competitors who do not have readily available financing to offer during their product sales process.

Cost-Effective Market Innovations Create New Profit Center Opportunities

Currently, the greater percentage of product financing is provided by independent (third party) leasing and financing companies or banks with equipment financing affiliates because of the various highly specialized components needed in a financing activity, such as credit assessment, documentation and deal processing, and financing management. Accordingly, companies that considered setting up an in-house product financing operation in the past were generally well advised to rely on outside financing sources because of the specialized operational components needed for an effective financing activity. Notwithstanding the operational and expertise challenges and added cost of running a financing company, however, a few product vendors, such as Cisco Systems, Inc., benefited greatly in increased product sales from the setup of their own in-house financing activity.

In today’s market, the availability of emerging technology products and services tailored toward a financing operation have substantially reduced the cost and challenge of setting up and running an in-house product financing operation. For the informed product vendor, therefore, setting up and running an in-house financing operation is now a viable option. There are now service and product providers who offer virtually all the components necessary to establish a financing activity, giving product vendors a cost-effective option to set up and run an in-house product activity that adds a new and effective marketing component for ­product sales. Because of the relatively recent innovative product offerings, which include specialized financing-related software, and the availability of third-party service providers offering specific solutions for a financing operation, product vendors should now re-visit the setup of an in-house financing activity because having an efficient, user-friendly, and cost-effective product financing readily available will not only enhance and increase product sales but can also add a substantial new business profit component. For example, companies like Terra Vista Software (https://terravistasoftware.com), based in Orinda, California, have developed software tools that can be used to process and manage a product financing activity, online. The Terra Vista software can automatically process a customer’s credit application, price optional financing offers, deliver a customer proposal, and if a proposal is accepted by the customer, set up and deliver the financing documentation, all easily managed by the software licensee. That coupled with many qualified back-office service providers who can handle the billing and collection of financing payments and assess applicable state and local taxes due and payable, minimizes the expertise a product vendor needs to set up an effective and profitable financing activity as a part of its product marketing strategy. Accordingly, using service and technology product providers offering all the essential components necessary to set up and efficiently run a financing activity, product vendors now have the opportunity, in addition to adding a new and effective marketing component for product sales, to create a new profit center.

Product Vendor Financing Using
Third-Party Financing Companies or Banks:
The Traditional Approach

The Third-Party Leasing and Financing Market

Independent and bank-affiliated leasing companies have, over many decades, provided a valuable financing service for product vendors by offering a variety of equipment and other product financing alternatives for product vendor customers. Most of these financing companies are well run and offer very effective and attractive financing programs for product vendors to make available to their customers, with some, often non-bank-affiliated, willing to take greater credit risks than others are comfortable doing for reasons discussed later in this book.

How Leasing and Financing Companies Develop Product
Vendor Business

In the early years of the leasing and financing business, most independent 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. Today, however, leasing and financing companies understand the benefit of affiliating with a product vendor and taking advantage of a vendor sales force to identify financing opportunities, setting up with product vendors what are referred to as vendor programs. Under a third-party vendor program, discussed in greater detail in Chapter 3, the financing company contractually agrees with a product vendor to offer financing to interested product vendor customers.

The fact is that having available product financing offered at the inception of the product sales process has become so beneficial to the product sales process that leasing and financing companies offering vendor financing programs specifically for customers of product vendors have developed a major and lucrative leasing and financing business segment. Prior to the emergence of the vendor program concept, third-party leasing and financing companies simply looked for product users who wanted financing for their product acquisitions. By working with a product vendor, a financing company can piggyback on the efforts of a vendor’s product sales personnel, a far more efficient and cost-effective way to identify potential financing customers. Over the years, the financing companies with aggressive and effective vendor financing program strategies have been able to substantially increase financing sales, and product vendors are now an aggressively sought-after market opportunity by many financing companies. As a result, vendor programs are now a major profit center for many third-party financing companies.

Third-Party Product Vendor Financing Structures Offered Today

Generally, the financing offered by third-party leasing and financing companies to product vendors for their customers consists of equipment leases and conditional sales arrangements, which are both effective and have, in the past, satisfied the needs of most product vendor customers. However, because of the relatively recent changes in the accounting rules, the traditionally offered financing structures can be somewhat limiting and, thus, often do not fully facilitate or support a product vendor’s sales or business needs or the needs of their customers. For example, traditional long-term finance leases, discussed in Chapter 8, now must be reported on the lessee’s financial statements as long-term debt obligations, something that had not previously been the case. Additionally, product vendors are increasingly offering services or supplies along with equipment or other products they sell to augment profits, which they want financed as a package. These types of contract offerings, often in a form referred to as managed services or fee-per-use agreements, are drafted by product vendors and provide equipment and services as a bundled offering, at times on a charge-per-use basis. Unfortunately, for product vendors offering bundled equipment, services and/or supplies, many financing companies, particularly the more traditional ones, have either refused or been slow to evolve in the marketplace, to accommodate financing for these types of agreements. The result has been to substantially limit or eliminate a product vendor’s new product sale strategies.

The Pros and Cons for a Product Vendor in Using Third-Party Leasing and Financing Companies

Working with an independent or bank-affiliated leasing and financing company has many benefits for a product vendor. ...