Profiting from Leasing Equipment

For a product vendor to properly evaluate starting an in-house financing activity, a basic understanding of how leasing companies generally make money is essential. Aside from financing profits, there can be other profit areas, many of which are not obvious to the lay person.

?Valuable Assets Acquired with Customer Money.

How would you react if a wealthy neighbor asked you to lease her an $80,000 BMW for her business use? Assume you could borrow, on a non-recourse-to-you basis, the entire purchase price from your local bank at an interest rate that gave you a $200 monthly profit. Also, assume that the lease would be for five years, the rents would pay off the entire bank loan and, when the lease ended, your neighbor would have to return the car to you in excellent condition. The result: at the end of five years you would own what could be a cream-puff BMW, with a market value of $25,000, free and clear, to do with as you wish. Sell it. Re-lease it. Or, simply keep it for your personal use. Sounds good? Most people would agree that it does. This is the basic business of equipment leasing in a nutshell.

Now, let us take this hypothetical example a step further. What if 10 individuals asked you to lease them BMWs under the same terms that also provided you with a $200 per month profit on each car? Your profit would be $2,000 a month and you would own 10 BMWs at the end of their respective five-year lease terms, all free and clear. Not a bad return for a no-money-down investment, particularly if you could borrow the entire cost of the BMWs from your bank, something that is possible with a correctly written lease contract. While this over-simplified hypothetical may not be realistic in the automobile financing market, where competitive leasing companies have to maintain an equity or end-of-lease residual investment in a car, which, unlike in our hypothetical example, makes borrowing the entire cost of a BMW from a bank unrealistic. It does, however, put into quick perspective one basic strategy used in the leasing business: getting credit-worthy companies to pay for and maintain assets that can be sold or re-released at the end of the financing term for profit which is additional to the profit made on the financing of the assets throughout the lease term. That said, assuming a zero residual in pricing equipment leases (totally amortizing the equipment cost over the lease term) is often possible with many types of general equipment. In any event, all the leasing company must do, once a lease deal is put in place, is to send out the rent bill (unless the bank it borrows from does this) and deposit the payment checks when they come in.