The company entered the equipment leasing business a little over a couple years ago. The variety of business they will look at ranges pretty much as far as the concept of “equipment” will take you: from technology, such as computers and software, to fuel cells to “yellow iron,” (slang for heavy construction machinery) Banks are getting into leasing again to find another source of income and diversification also drives this decision.

 

Annually, American businesses, government agencies, and nonprofit organizations purchase more than $1 trillion in capital goods and software, and more than half of that is financed through loans, leases, and other financial techniques, according to the Equipment Leasing and Finance Association. ELFA estimates that 16 million equipment lease contracts are executed annually in the United States, with 14 million of those deals done with small- and medium-sized businesses as well as large non-investment grade businesses. That’s a lot of demand. Leasing isn’t a new business to banking, but a new opportunity for many institutions that haven’t tried it before.

 

Banks get into leasing in multiple ways, and sometimes they use more than one strategy. Some do direct leasing, working with the actual lessee company. Some work with vendors or dealers that offer leasing as an option to customers. Others buy portfolios of leases made by other leasing operations, and some acquire leases as indirect lenders—pretty much as banks traditionally acquired paper from auto dealers. In getting into the business, some banking organizations have bought existing leasing companies, while others have started their own operations, but hired experienced leasing executives or whole teams that know the business. There are banks that hold their leases, while others package leases for resale.

 

Statistics say that 80% of commercial companies lease something, so if your bank doesn’t have a leasing company, that means your commercial customers are getting leasing from somebody else. The possibility of leveraging a bank’s commercial customer base can be significant.

 

Banks are looking for larger spreads than they are getting in other asset classes. One of the challenges for community banks in this space is thinking of equipment leasing as a variation on traditional C&I lending. It’s actually a very different business.

 

For one thing, leasing typically covers 100% of the price of the equipment. When you tell a banker that you are lending at 100% of collateral value, they’ll look at you as if you were crazy. The 100% financing opportunity, though matched by some commercial lenders now, remains an attractive feature to smaller firms that want to conserve cash for other purposes, while acquiring essential equipment or software. Customers are financing use of the equipment, rather than the item itself. (Though often, bank leasing winds up being another path to eventual ownership.) The related benefit to the lessee is that there is no down payment, and typically the equipment is the only encumbered item, versus loans that might entail pledging other assets.

 

Another argument often used in favor of leases is protection from obsolescence. Because the lessee doesn’t own the collateral, they can move on to newer equipment. Some bank leasing operations will not get involved in equipment that has a short shelf life.  Generally, leases are made at fixed interest rates, which has appeal in general, but even more now as rates have nowhere to go but up. Leases can be structured with more flexibility than loans. For example, the lease deals are not as tied up in financial covenants as are traditional commercial loans. Bankers find that leases can sometimes command a better rate because of the advantages outlined to the customer. However in an environment where many hungry lenders price loans aggressively, this isn’t always the case. Leasing arrangements can involve accounting and tax issues that banks and their customers must consider as deals are weighed.

 

Bankers' New Lease on Life (Continued)

  
  • LinkedIn Social Icon
  • Twitter Social Icon
  • Facebook Social Icon
  • Google+ Social Icon
  • Instagram Social Icon
  • Snapchat Social Icon
  • Pinterest Social Icon