Vendor-leasing programs enhance sales, profits

Yet, it’s surprising how many companies do not provide a leasing program. Some say it’s because their customers have their own sources. Others say their customers pay cash. These mindsets can be costly in a variety of ways.

The biggest problem is that the lack of a lease program can drive the customer to the competition. Customers can view the vendor as a one-stop shop where they can both fulfill their orders and get the financing they need, rather than having to seek financing from a bank or other financial institution.

Shopping scenario

Some equipment suppliers offer a leasing program but give customers a choice between several leasing companies. That may sound practical, but “shopping” deals with a multitude of leasing companies can actually lower the chance of approval.

If the customer chooses one of the leasing companies, and is subsequently declined, three negative actions may result.

First, the credit inquiry lowers the customer’s credit score. Second, it will be clear this is a shopped transaction, and will make it more difficult to get the credit approved. Third, if the transaction is approved, the lower credit score will cause the rate to be higher.

Establishing a sound relationship with one reputable leasing company is a sound course of action for both vendors and customers for several reasons:

• The relationship (allowing one leasing company to be involved) should result in lower rates for customers, thereby making it more attractive to buy from the vendor. If a vendor uses multiple companies and shops deals, they will not usually get the best rates.

• Using one leasing company results in better pricing because of increased volume. Leasing companies make more money when deals come through referrals rather than expensive marketing. The referral business is more profitable because it provides a steady stream of deals from clients who are looking to acquire equipment now and need financing.

• Because maintaining the relationship with the equipment supplier is critical to profitability, the supplier will do everything in its power to keep the approval rate high and the lease rates low. These savings are passed on to the client.

• The leasing company will be more motivated and go the extra mile to fund the most challenging credits.

• Because of economies of scale involved with large volume directed to the leasing company, the supplier is often entitled to referral fees of 1 percent to 2 percent, thus providing an additional income stream.

Utilizing credit control allows the vendor to maximize approvals while getting the best possible rates for clients. Leasing companies often spend a lot of money on marketing to increase their sales volume. With a vendor-leasing program in place, the leasing company receives a steady flow of similar clients who are seeking equipment now and need financing. Since no additional marketing funds were incurred to get those clients, leasing companies pass on the savings by virtue of favorable pricing.

Thus, the company’s customers benefit by enjoying lower financing costs as a result of the direct relationship with the leasing company.

Requirements

To set up a vendor leasing program, the financing company will typically expect the company to be in business for at least a year. It will review the stability of the business and its customers. Leasing is usually easier to obtain than bank loans or letters of credit, even though there is a determination of risk to the finance company.

Providing a lease option to your customers has its advantages. Both the leasing company and equipment supplier will likely enjoy increased profits and the customer can acquire much needed equipment without a large down payment.

Kent Harlan, CPA, is owner of Ozarks Capital Funding. He can be reached at kenth@ocflink.com.