Avoiding Leasing Pitfalls (BTA - Office Technology Magazine) Your customers are trusting you - should they?
By Mark A. Schmitt, Greater Bay Bancorp/Greater Bay Capital
Leasing can be very safe and customer friendly. But it often involves a substantial change in the way office equipment dealership owners, managers and sales reps approach leasing and their customers. The most important asset your business possesses is your customer base. Protect the confidence your customers have in you. Never allow short-term thinking to place that at risk.
Office equipment dealers have found their customers under siege by leasing companies. Derived from my 20-plus years of leasing experience, I would like to share with you the importance of the trust customers have in the dealership, how and why this happens and what dealership senior managers must insist on to protect accounts.
All office equipment dealerships utilize financial merchandising on an ongoing basis. This is done primarily as a way of cost justifying the equipment sale. Paying over time often allows the equipment to pay for itself each month through either the savings or the additional revenue generated by the new equipment.
Sometimes customers may desire the depreciation/ownership benefit and want a $1 buyout (a loan disguised as a lease) or they may want the ability to expense their monthly payments via a True Lease. However, it is usually the equipment sales representative who leads the customer in the selection of a payment plan and a finance company.
Do not make a low rate factor your employees’ top priority. Your customers will gladly pay a little more to be treated fairly. So often we hear that the lowest rate is all some dealerships want. They are convinced that saving or making an extra buck via a lower rate factor is all that matters.
Is it? Many of the lowest rate factors are from leasing companies that have annual renewal provisions in their document. That means if your customer fails to "properly" notify the leasing company of the intent to purchase or return equipment, the customer is contractually obligated to pay another year’s worth of payments. Over the years I have been told by several dealership principals that they like having the annual renewals in the contract because it allows them to come in at the end and act like a hero, negotiating a way out for their customers. Meanwhile, the customer is desperate for any assistance to get out of the extra innings of the contract. Don’t kid yourself. If the customer had negotiated the financing without the involvement of a dealer, the contract would never have been signed. The customer signed the contract trusting in the dealership. That unequivocal trust is compromised. Occasionally we hear dealership principals realize later that they and their customers can get burned playing with fire, but the damage is already done.
Sometimes the dollar buyout is not a dollar. The way it is supposed to work is at the end of the scheduled payments the finance company shuts off the lease. Many dealerships have found out the hard way that some of these contracts contain verbiage dictating that unless the customer notifies the dealership of the intent to buy the leased equipment, and actually sends in the dollar bill within the prescribed window of opportunity, the customer will be billed indefinitely at the same monthly payment. I know that may seem difficult to believe, but unfortunately truth in lending does not apply to commercial transactions. Never use a finance company with renewal language in its dollar buyout leases.
Fair Market Value (FMV) leases continue to be the most popular type of lease. FMV means just that. At the end of the lease the purchase option will be fair market value. Translation: The leasing company can charge whatever it can get away with ? it is harvest time. What dealer principals need to know is that when an FMV lease is written the finance company knows from day one the actual residual number. Usually this is kept a secret because knowledge of the true position limits the upside potential.
Always know the true residual position on all FMV leases and get that in writing on letterhead. This will limit excessive profit taking at your customer’s expense. Prudent dealerships strive to have leasing partners that share their expectations for true equipment worth. When the dealership and the leasing company have differing expectations on residual evaluations your customers usually end up getting hurt.
Select a leasing partner with a month-to-month renewal and a notification period of 60 days or less. Finance companies, like all businesses, will enforce whatever contract provisions they are legally entitled to if it means not taking a loss. There is usually a return notification window some time before the end of the term. It is normally 60 to 180 days. The logic is that if the equipment is to be returned, the lender needs time to find a home for it. If that window is missed, the customer may be stuck making another year’s worth of payments.
What about equipment returns? The days of telling the leasing company to "come get your equipment" at the end of term are gone. The lease is with the customer. The customer is responsible for crating, insuring and shipping the equipment to the destination determined by the leasing company. Once the equipment has been returned, the customer may be billed for any deficiency below what is deemed "normal wear and tear." Many a dealership has picked up equipment from a customer at the end of the term, only to find out that by removing the equipment from the customer’s location, the customer has violated the contractual agreement. The dealership is a third party to the contract. It has no authority to act as a binding liaison.
Only use FMV rate factors where you honestly believe you would be willing to buy the equipment back for the pre-determined amount at term end. (If the equipment will not be worth the option price to you, it certainly will not be worth it to the leasing company. This keeps your customer safe from surprise charges at the end.)
Whose customer is it anyway? Document that all buyout quotes and sales of equipment during and after the term are given to you. Some leasing companies have begun to negotiate term extensions and in-place sales of the equipment while circumventing the dealer of origin. Dealers are often taken by surprise when their negotiating power for upgrade opportunities have been undermined by a leasing company. The customer can also be surprised to learn that the extension of the term negotiated does not include any maintenance.
If possible, obtain a right of first refusal to buy the equipment back for the predetermined price on all of your leasing sales. This keeps you in the loop and prevents the leasing company or anyone else from eliminating your repeat business.
Early payoff requests can be a problem. Insist on unearned interest being rebated from the payoff/upgrade price. While all companies say they have no prepayment penalties, most still require the customer to add up all the payments and pre-pay them. This can really catch you and your customer off guard. If your customer just signed a 60-month term contract and wants to pay it off or upgrade 12 months into the term, why should the customer be required to pay four years worth of unearned interest? Just because the customer wants to buy the equipment early or upgrade should not mean a windfall of unearned income for the leasing company. Five years is a long time, so ask for that in writing as well.
Avoiding a Mess
While all the above really looks bad on paper, and it is, in order to protect your customer base it is important to understand how we got into this mess in the first place.
Dealers usually think short term; finance companies always think long term.
Most sales departments are very focused on monthly goals and commissions.
Generally, they think about the here and now and worry about the future in the future. Not so for finance companies. They always think long term. They do not make their money when the lease contract is booked, but rather over time. All FMV transactions are in the red, in terms of profits, until:
someone buys the equipment at or above the anticipated residual price (purchase option); the customer has made enough extra payments to make them whole; or all the fine print that can be enforced is enforced (nickel-and-dime the customer until the finance company is in the black).
The fact that dealerships and the finance companies have varied outlooks creates huge blind spots for dealers and their customers.
Once the leasing documents are signed, it is too late to negotiate. Do it up front; make them earn your business. Once a contract is executed, the customer is obligated to make all payments on time. To some leasing companies it does not matter where the contract is serviced. The customer must pay each month or be sued by the leasing firm’s state side, bulk rate, in-house counsel. The more expenses the finance company can save in terms of servicing the customer, the higher the profit margins over the term.
This is why you see so many companies outsourcing or having their own "centers of excellence" for operations, collections and customer service overseas. Find out where your accounts will be serviced. Select a leasing partner where your relationship manager is the same person who will handle all facets of your business, not just the fundings.
When BTA dealerships focus solely on rate factors, the pressure is created in the market to meet that requirement. The lease/finance companies in turn look for creative ways to make up their margins. If the determining factor for earning business was "Who is going to treat my customer the way they expect to be treated?" we would have these same leasing companies focusing on ethical treatment of your customers rather than price.
So many dealers believe they can beat the defense system of these large financial giants. Like betting against the house in Las Vegas, you may win once or twice, but the house controls the odds and will always recover its money. We continually hear "how can that leasing company offer rates that low? Are they nuts?" No, mom was right. There is no free lunch. If it is too good to be true, then there is a snake hiding somewhere in the grass.
Fortune 500 lease/finance companies do not foolishly invest billions into FMV leases without a clear path to solid returns. Dealership principals must understand that path and determine if it is compatible with the direction they wish to travel, long term, with their customers.
Building a Fortress
Make a management decision as to which funding sources are authorized to be used by your sales reps. Have a screening process. Your company reputation is at stake. Never trust your reputation to someone who may be thinking only about the immediate commission.
Seasoned business professionals buying office equipment negotiate every day of the week. Obtaining an order in today’s market is something to celebrate. The economy is still off, most purchases are carefully screened and many are competitively bid. Separately, they carefully select whom they bank with and whom they invest with. So, why is it they usually do not apply the same due diligence when it comes to financing the equipment sale?
The answer: Because they trust the sales professional and the dealership he or she represents.
It has been said that true sales masters are viewed by their accounts as specialized consultants. Bids are won when customers have confidence that their needs have been understood and the right solution is a suggestion from the sales rep. That confidence and trust can take years to earn, but once earned it can be a solid fortress, keeping your competitors at bay, solidifying a competitive edge for you for years to come. If that trust is broken, the customer will never look at you the same; you may find your dealership on the outside of the fortress.
Dealerships and the leasing companies they work with must look out for one another’s interests. When they do not the customer pays. If enough dealerships insist on financing partners with a long-term approach that protects the customer and the integrity of the dealership, the market will be changed for the betterment of all.
Mark A. Schmitt is senior vice president for Greater Bay Bancorp/Greater Bay Capital. Greater Bay handles the BTA National Leasing Program and can be reached at (866) GBC-BTA1 (866-422-2821).
Dealership Check List
What should a BTA dealer look for when determining which leasing company will get the business of his or her dealership?
Do not make a low rate factor your staff's top priority. Your
accounts will gladly pay a little more to be treated in a fair
manner.
Select a leasing partner with a month-to-month renewal and under
60-day notification period.
Never use a company with renewal language in its dollar buyout
leases.
Know the true residual position on all Fair Market Value (FMV)
leases and get that in writing on letterhead.
Only use FMV rate factors where you honestly believe you would be
willing to buy the equipment yourself for that amount at term end.
Insist on unearned interest being rebated off the payoff/upgrade
price.
Document that all buyout quotes and sales of equipment during and
after the term are given to you. If possible, obtain a right of
first refusal to buy the equipment back for the predetermined
price on all of your lease sales.
Find out where your accounts will be serviced. Remember, once the
leasing documents are signed, it is too late to negotiate the
contract.
Make a management decision as to which funding sources are
authorized to be used by your sales reps. Have a screening
process. Your company reputation is at stake. Do not trust that to
someone who simply may be thinking about making a quick buck.
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