Leasing The Channel’s Financial Lifeline30 Mar, 2009 By: Tom Callinan imageSource
Leasing The Channel’s Financial Lifeline
Two contributors to the health of the copier industry have clearly been steady financing rates and declining aftermarket costs. I define aftermarket as service, parts, and supplies. These two occurrences have enabled the copier dealer to upgrade their lease portfolio for
basically the same monthly payment somewhere between 66 and 75 percent through the contract.
Now think about your business without a healthy leasing partner? That sounds unbelievable; since the inception of the copier dealer we have had the benefit of a multitude of available leasing partners. At the beginning of this symbiotic relationship, if you did not like the
“rates” that one company was offering, you simply started sending your applications to another leasing vendor. Although there are still dealers that look for the lowest rate provider—some on a deal by deal basis—that has become more difficult as vendors and dealers alike have
worked to build better relationships. Nevertheless, the lower rate providers do have influence on the rates that other leasing companies are able to charge. If leasing company A is charging 0.0210 for a 60 month term with zero advance payments, and leasing company B decides to
enter the copier market and comes calling with a 60 month rate of 0.0197 you will, as a good business person, use company B’s rates to negotiate some type of promotion or a rate decrease from company A. Additionally, the significant competition in the leasing space creates an
environment where leasing companies hesitate to charge what may be considered a rate that provides a fair return for their risk.
Funding It - Keep in perspective that all else being equal, such as advance payments or fees, rates are driven by residual value and the cost of funds (interest rate) the leasing company charges the dealer. The only way for one leasing company to provide a lower rate than a
competitor is to charge less for the funds, more in fees, or to make an assumption that residual values at lease term will be higher. Or to have a strategy of building up a substantial book of business and selling it at a profit to one of the larger leasing companies. What
interest rate drives a 0.0210 rate with a 10% residual and zero advance payments? 11.96%. That rate might sound healthy but the leasing company needs to cover their losses, expenses, and cost of money—as well as make a profit out of that 11.96%. So who cares—let the leasing
companies battle it out. I do strongly recommend that you develop a relationship with a strong leasing company that is committed to the imaging industry and that clearly has financial strength. Businesses need to earn a profit to stay in business. Copier dealers have become
very talented at squeezing leasing companies and leasing companies have become very talented at finding a way to make a profit. Remember the days of terming out the lease payments and sending back the equipment? or recall when only the most aggressive leasing companies piled on
fees to your customer base? Termination fees anybody?
When it comes to leasing companies I would find one that I feel will be around for the long-term and has a strong reputation of customer service to the dealer community and end user. I would also make certain that they have a solid print management program. I would negotiate
a fair vendor agreement with the leasing company and fair rates. Fair to me and fair to the leasing company. I would then work to develop relationships at multiple levels within that leasing company.
Two to Tango - For my loyalty I would expect the leasing company to treat my customers as if they were theirs—a foreign concept with some leasing companies—treat me as a valued customer, and approve the occasional marginal transaction. If they could provide other value add
like inventory floor planning or training that would be another benefit. I would also have a relationship with a second leasing company for the occasional solid company that my primary leasing company denies because of overall exposure. Maybe they have a jet leased through
another arm of the leasing company—really—and the leasing company cannot handle any additional exposure. My secondary leasing company will gladly take the exposure on this otherwise strong company. What I would not do is send my secondary leasing company every deal my primary
leasing company has turned down; this is a recipe for destroying a relationship. If you have annual lease volume that exceeds $5 million, I may send my secondary lease company $1 million or so a year to have two companies that could do me the occasional favor on a marginal
credit. There is no reason to have relationships with more than two leasing companies.
A strong leasing relationship is not going to cure increasing financing rates and stabilizing aftermarket. After all, aftermarket cannot go to $0.000, so it will stabilize for black prints. Revenue stabilization will be good from an aftermarket revenue perspective but it
will make upgrading equipment more difficult (even as aftermarket CPP has decreased, margins have remained consistently in the 50% range because of increased equipment efficiency driving better technician productivity). The copier dealer must also focus on driving down their
general and administrative expenses, enter the print management space, and start to sell color applications; not just color boxes, so that they gain more color clicks, and additional aftermarket revenue. The dealer can no longer depend on upgrading the base 75% through the lease
Tom Callinan is the founding principal of Strategy Development, a management consulting firm. He is a speaker/track leader at ITEX’09. For more information visit