Financing and Leasing

Written by Diane M. Calabrese | Published August 2024

Giving credit where credit is due can be a boon to a seller.

The option to finance or lease through the seller may be just the add-on service that persuades a buyer to choose one distributor over another, and that’s a good outcome.

The seller who offers financing and/or leasing, however, takes on additional work. So, of course, the investment of additional time must bring a return.

Moreover, whenever a company becomes a lender of money, there is the possibility that the terms of the loan— financing and leasing by other names—will not be met. In such instances, financing and leasing incur losses.

The bottom line is that the decision to offer financing and/or leasing must be made with the same due diligence as any other business initiative. For some companies, it’s a good decision.

“We offer short-term and long-term leasing through Lease Consultants and have a very high percentage of the leases approved,” says Roy G. Chappell, CEO of Chappell Supply and Equipment Co. in Oklahoma City, OK. And the program is good for business.

“It is a great tool to help sell equipment and then get your money in two or three days,” says Chappell. “It is a big help to our customers also. They like to have us handle the paperwork and the different types of leases.”

There are challenges. Among them is the information, such as tax returns, that sometimes must be gathered on the company wishing to lease.

“We do not offer financing except with a very few long-term customers who have a proven track record of paying on time,” says Chappell. “We’re not in the finance business. We may let a customer pay half down and the other half in

30 days, but as I said, it has to be a long-time customer with a proven payment record.”

As with any seller and buyer interaction, a seller must exercise caution. “Be very careful of a new customer that comes in around five p.m. or on the weekend and is in a hurry to buy or lease,” says Chappell.

Talk. Get to know them. That’s the place to start.

“They may walk out, but there is a reason if they do so,” says Chappell. “Always ask questions, get answers, check the answers, and call the company they work for after you have looked up the company and have the phone number.

Just make sure they are who they say they are.”

Verifying the identity of customers has never been more important. It’s so easy for would-be thieves to steal an identity in 2024 that one would think nothing could make it simpler, but

Options Are Good

What’s the best strategy for a business? Perhaps it should offer both financing and leasing if it is going down the path of assisting buyers in an additional way.

Or perhaps it should start with one or the other. Troy Jaros, president of Lease Consultants in Des Moines, IA, shares some basic recommendations.

lease may stipulate after how many hours logged the machine must be returned for servicing.

“Have both options available to your customers,” says Jaros. “They both have advantages depending on the customer’s use of the equipment.”

Jaros zeroes in as regards the plusses for customers. “Financing allows for the customer to preserve cash flow for daily operational needs, set up terms that best fit their budget, reduce financial risk by spreading out the cost of equipment over time without a significant initial investment, and own the equipment at the end of term,” he says.

“Leasing allows for the customer to have all the benefits of financing equipment except they don’t own the equipment at the end of term,” explains Jaros. “Leasing protects the customer from obsolete equipment, which can occur from heavy usage or technological advances.”

There are risks in every business venture, and no less so with an offer of financing and/or leasing to customers.

And there will likely be an additional cost to the lessee if the machine exceeds hours of use or misses a routine maintenance check. Since it’s not always easy for someone leasing equipment to know how many hours of service it will see, additional fees—or cutting back on jobs—will be in the offing.

The flip side for the lessee is entering into an agreement anticipating a need for a machine for a certain period of time and then having a contracting job fall through. The terms of the lease for the unneeded machine must be met. There may be a way to do an early return, but it will not generally be cost free.

Fees attached to leases can accumulate. Understanding all the costs attached to leasing, which can be an excellent option for short-term or one-time needs, is imperative.

“At the end of the leasing term, a customer may have to return equipment at their expense,” says Jaros. “Furthermore, if the customer decides they want to purchase equipment at the end of the lease term, there may be a large purchase option that wasn’t disclosed at closing.” departments of motor vehicles in many states have stepped in to make it easier.

Read the contract—tried-and-true words. But, really, read the contract.

Drivers in many states can now put their driver’s license on their phone. If the license is on the phone, it’s on every other device connected to the phone, which means the chances of it not being in the cloud are remote. Even today, most people do not understand how fully integrated all of their personal data are and how easily they can be compromised.

The short of it—just because a person has a picture ID in the form of a valid driver’s license with a photo and license stamped as Real ID, the identification should not be taken at face value.

What is the biggest risk in financing? “If a customer defaults on a financing contract, then the credit rating for a business or owner(s) of privately held businesses will be negatively impacted,” says Jaros.

So the potential downside in financing is weighted toward the business that offers it. It’s a bit different in leasing in that the customer assumes more risk—in the form of more responsibility and restrictions.

What is the biggest risk in leasing? “In addition to defaulting on the lease contract, customers may have to comply with a service and/or maintenance agreement that limits usage of equipment,” says Jaros.

For instance, a lessee may be authorized to use a machine for a certain number of hours during a month. The

Plenty Of Help

Advice about financing and leasing comes from several directions. Take advantage of it. The U.S. Small Business Administration ( SBA.gov) is a good place to start. It offers tips that apply both to the business owner and the prospective lessee or borrower.

It’s worth noting—but a bit obvious—that a business owner can offer financing and/or leasing to customers as well as take advantage of financing and leasing. Many business owners choose to lease computers or office furniture, for instance.

Financing may be a choice for many reasons, but the most common is that it keeps payments smaller. And when all payments are met, ownership can be taken.

Leasing can also keep the month-to-month expenditures of a company lower, but at the end of the lease period, there is no ownership. Essentially, the lessee pays to use someone else’s equipment.

The pros and cons of leasing and financing should be considered from all angles. Some companies can benefit from owning equipment because the depreciation that can be taken on taxes helps the bottom line. Other companies may not have enough capital tied up in equipment to make the depreciation amount significant, so leasing may be a better choice.

Unless they are very large, businesses offering financing and/or leases typically work with a finance company. And finance companies of every size offer robust advice to companies considering financing or leasing. Tap it.

On the other side of the equation, a buyer seeking financing may want to compare the arrangement available through his or her bank with that available from the seller. Evaluate not only rates, but also time to approval and credit-building possibilities. Financing through a bank may be a way to build business credit.

A seller offers financing and/or leasing to simplify—just a little—life for a customer. Each party to the arrangement should realize a gain. Neither party should walk away from the agreement and perceive it as a bad deal.

Nothing makes leases or financing arrangements go sour faster than the perception on one side or the other that it is not a win-win. The side with the greater risk is almost always the business offering financing or leasing. That’s for several reasons.

For example, a late payment here or there can disrupt cash flow at a business. Leased equipment may be returned (or found if absconded with) in poor condition, perhaps a loss.

Explore the possibilities of financing and leasing. But only go forward with care, giving credit where it is due