Since interest rates have shot up as the Federal Reserve continues to battle inflation, which has reached a 40-year high, tomorrow’s borrowing trends have certainly been impacted. But to what degree remains to be seen.
Factoring in supply chain disruptions—the inability of OEMs to satisfy equipment demand that was pent-up during the pandemic and now continues to rise—and the wheels of commerce continue to spin without rubber grabbing the road. This, as we conclude this month’s State of the Industry report on leasing, our dealer panel offers its views of what trends we can expect to see moving forward.
Not every dealer follows the crowd when it comes to business models. David Carson, president of Plus Inc. of Greenville, South Carolina, notes his dealership has gotten away from the model of bundling leases, pushing rollovers and upgrades. He’s sat in on seminars that stressed the popular approach of having service tied into and bundled with the lease in order to be more profitable. The client propensity to keep machines for the long run has proven to be more lucrative for Plus Inc.
“A lot of machines in the field are six to eight years old,” Carson noted. “I’d say at least half the people who lease equipment buy it out at the end of the lease, especially the smaller companies because the equipment doesn’t break down like it used to. We’ve got a good portfolio of MIF that are eight years old and still under contract. That’s when the profit kicks in, when you grow 10%-15% annually on a contract and you’re able to keep that going for six to eight years.
“The customer doesn’t mind paying the higher rates because a lot of them don’t want to buy new machines. The challenge for us is getting them to upgrade machines when they really need to. For us, the profit is on the back end, the supply and service side. It helps keep the competition out when there’s no lease.”
Carson believes the future of leasing needs to be more favorable to the lessee. “There’s a lot of debate about the structure of leases, how they’re written to favor the dealer only, and I think you’re going to start seeing a lot of pushback on that,” he added.
One trend of utmost concern for many dealers is rising interest rates. AJ Baggott, COO for RJ Young of Nashville, Tennessee, points out that a lessor understands that the profit created from leasing is the result of the credit spread between what rate you borrow and what rate you are loaning.
“Most leases are locked for the term at a set interest rate, while most credit facilities that leasing companies secure to fund these leases are on variable interest rate model off of LIBOR, SOFR, or PRIME rates,” Baggott noted. “The inherent interest rate risk associated with leasing is amplified by hyper-inflationary economic environments that result in increasing lease rates. It bears watching how much the Fed intends to raise rates before we see a leveling of post-COVID norms.”
J. Mark DeNicola, CFO/CSO of Knoxville, Tennessee-based Centriworks, believes the business disruption experiences of the past two and a half years will be hard-wired into future agreements. “Terms would include suspension of payments and extension of time terms for unexpected closures due to conditions like the pandemic and government-mandated shutdowns,” he added.
Jim Dotter, president of Richmond-based Virginia Business Systems (VBS), believes the company’s Simplify program resonates with clients and prospects, and will continue to garner momentum moving forward. The beauty is that it enables VBS to add ancillary services such as MPS, managed IT, solutions, and unified communications to its program with line-item costs.
“One easy-to-understand invoice to provide their office technology is something we are working towards, making our clients’ work environment simple and streamlined,” Dotter said. “Many customers pay via ACH too, cutting costs to process invoices. If the payment is the same each month, it reduces the number of times it needs to be addressed.”
Dealers with leasing arms poised to make investments in their infrastructure will help address future needs, notes Jennifer Watts, manager of leasing operations for Gordon Flesch Company of Madison, Wisconsin.
“We have invested in upgrading our backend technology, so automation trends will be important, as will any new regulatory requirements,” she said.
