Equipment leasing companies have
special banking needs. While most
financial institutions attempt to place leasing companies in a regular commercial division, a small cadre of banks
provide lease funding solutions specifically tailored to meet the needs of those in
the equipment leasing industry.
“Independent leasing companies are a
niche type of business,” says Brian Griffin,
senior vice president, leasing, for MB
Financial Bank in Chicago. “Most banks
don’t understand how leasing companies
work. Leasing companies have a variety
of needs that are specific to their industry.
Those needs include warehouse lines of
credit, equity lines of credit, equity sharing and debt discounting. MB provides all
of these products.”
Smart Business spoke with Griffin
about warehouse lines of credit, the
advantages of an equity line of credit and
the importance of working with a bank
that understands how leasing companies
operate.
Why do businesses typically choose to
finance equipment?
Businesses often choose to finance
equipment because it’s a large capital
expenditure and they don’t want to lay out
large dollar amounts upfront. A lot of larger companies’ budgets don’t allow for
large equipment purchases upfront, but
they will work with independent leasing
companies to make monthly payments
over a period of time. Also, some companies prefer to have an operating lease
treatment, which means they can finance
the transaction off a balance sheet: They
don’t have to include the asset or liability
on their balance sheet; they just include
the monthly rent payment that they have
on a lease.
What are the advantages of leases over
loans?
Leases are most advantageous to companies that are acquiring equipment that
is subject to technological obsolescence,
such as IT equipment or medical equipment. A lease provides the lessee with the flexibility of little to no down payment,
lower monthly costs, and the ability to
return or release the equipment at the end
of the initial lease. Leases also allow the
lessee the possibility of upgrading the
equipment prior to the end of the lease
term.
What is a warehouse line of credit?
Leasing companies typically fund leases
and then get their funding for the transaction from a bank. A warehouse line of
credit allows a leasing company to fund a
transaction on their own before obtaining
their permanent funding from a bank. A
good analogy, although perhaps not so
good in today’s environment, is a mortgage broker. First, a mortgage broker
funds a mortgage. The mortgage broker
then gets money from a bank through a
warehouse line of credit. Finally, the mortgage broker sells off the mortgage to an
investor and gets paid back. Leasing companies work the same way: They bundle
leases themselves by using a warehouse
line of credit, and then they assign it to
another lending source.
How can a leasing company benefit from a
warehouse line of credit?
Leasing companies are typically not capitalized well enough to fund large transactions. As a result, they need a bank to, at a
minimum, fund the underlying transaction. Traditional financing options, however, don’t help a leasing company that a)
wants to fund a transaction without
requiring a bank approval; b) needs to
fund progress payments on a deal before
it goes to term; or c) wants to shop the
market for an attractive rate. A warehouse line of credit provides a leasing
company with flexibility by having the
lender fund the lease or progress payments for a short period of time — typically 90 days — before the deal is sold to
a permanent lender.
What are the advantages of an equity line of
credit?
A leasing company typically invests
equity into a deal, commonly called the
residual. This is money that is permanently left in a transaction until the end of a
lease term when the equipment is either
sold to the lessee, the lease is extended or
it is sold to a third party. An equity line is
typically for a smaller amount than a
warehouse line of credit and requires a
fairly strong lessor. It is also for a higher
rate of interest than the warehouse line
because the line is funding equity and not
debt. The equity line of credit is full
recourse to the lessor.
An equity line of credit provides lessors
with more opportunities to do business as
they can leverage their equity. Since banks
are providing the equity loan for them,
leasing companies can pursue more deals
by borrowing the equity in some of their
transactions. With greater access to capital, they are able to do more business
while still retaining the benefits of owning
the equity.
BRIAN GRIFFIN is senior vice president, leasing, for MB Financial Bank in Chicago. Reach him at [email protected] or
(847) 653-1874.
