Why Are Car Leases Different From

Equipment Leases?

                             By Larry McGinnis

Leasing is by far the most common way that companies finance equipment purchases. It works this way: The customer commits to a monthly payment for a fixed period or time. The leasing company purchases the equipment from the dealer and leases it back to the customer. The dealer is paid in full up front for the equipment.

The type of lease and the duration of the lease determine the amount of the payment. The most common type of lease is the fair market value lease. Other types of leases include the $1 buyout lease and the 10 percent security deposit lease. When we talk about the type of lease, we’re generally referring to the amount owed by the customer at the end of the lease. With the fair market value lease, at the end of the lease, the customer can purchase the machine for the fair market value of the equipment—the amount that other used machines of the same type are sold for on the open market. With a $1 buyout lease, the customer can purchase the machine for $1 at the end of the lease. The 10 percent security deposit lease requires the customer to deposit an amount with the leasing company when the lease is signed. This deposit amount usually becomes the amount of the payoff at the end of the lease. The monthly payment is reached by taking the amount of the invoice and multiplying it by the lease rate.

Recently, I was asked the following: How can car dealers offer a lease on a $22,000 car for $395 per month; and why can’t equipment dealers do the same thing? The normal way to figure a lease of this type is to multiply the amount of the car, $22,000, by the lease rate, let’s say 0.0317, the 36-month lease rate. Using this normal method of leasing, the payment would be $697.40. So, how can car dealers figure a payment of $395? The car dealer uses the end value of the automobile in the lease factor. The value of the car at the end of the lease can be determined by past performance for like makes and models. The end value of the car is then subtracted from the cost of the car, and the lease factor is used on the remaining balance. You’ll notice that all auto leases carry a mileage limit. The end value drops when extra miles are put on the vehicle.

So, the question is why can’t we do the same thing? Well, we can, if we’re willing to defer the profit for the term of the lease. Think of the competitive advantage of quoting a lease payment that is 30 percent lower than your competition for the same or similar equipment. Here’s an example: Let’s say the retail cost of the equipment is $6,578 and the known end value at the end of 36 months is $2,400. The normal lease payment is $208.52. By deducting the end value from the lease amount, you get $4,178 or a lease payment of $132.44.

To do this, you must have a firm agreement with your lease company (in writing) or you must do in-house leasing (run your own lease company) ensuring that the machine will be yours at the end of the lease. Remember, you’re deferring the profit of the deal to the end of the lease. Also, you must have a firm notion of the end value of a given piece of equipment. And finally, it’s advisable to put meter limits on the equipment leased in much the same way that auto leases carry mileage limits.

You can’t do this type of lease on every deal or you’d be out of business very soon. However, if used only when you’re in a tight competitive situation or when it would be advantageous to you, it’s a strong weapon.  If spaced properly, you can use this method to grow a good rental fleet or build a good set of used machines that can turn some considerable profits.

Leasing is a powerful sales tool, and it can be used in many different ways. Just think a little off center, and you’ll come up with ways that can make leasing work harder for you.

Larry McGinnis brings over 30 years of experience to the office machine business. His company TEC-AID markets a service department management program called ServiceTrak and a sales aid program called SalesBuilder Plus. He can be reached at 866/983-2243 or check out his Website, tec-aid.com.