Terms and Conditions May Apply, but Leasing is Essential to Dealer Success

How would you like to pay? As consumers, it’s a message we’re bombarded with on a daily basis. The ways and means of completing a transaction have billowed to the point where cash has almost become the red-headed stepchild. We couldn’t possibly have envisioned a day when a phone or watch could be used to transact business.

In the B2B office technology universe, not many end-users are accessing their Apple Watch to square up a deal for a copier or scanner. Traditional leasing and financing tools still rule the day. The Equipment Leasing and Finance Association (ELFA), which monitors the $1 trillion equipment finance sector, reported that its Monthly Leasing and Finance Index (MLFI-25)—companies representing a cross-section of the finance sector—finished out 2023 on a high note despite concerns regarding interest rates and a possible recession. It’s an indicator that while conditions aren’t optimal, business is still brisk.

This month’s State of the Industry report on leasing provides eight viewpoints from dealers large and small. We touch on the roles of dealers as both consultants and deal closers, examine some of the impediments to securing leases and detail the tactics competitors use in acquiring net-new clients. As you’ll see, it’s a matter of striking a balance between the needs of a customer and the obligation dealers have to maintaining profitability while sometimes absorbing risks.

Doug Pitassi is a huge fan of the leasing companies. The president of Pacific Office Automation in Beaverton, Oregon, believes they’re instrumental to the dealer’s success, and he counts many of the biggest financers to the industry—Wells Fargo, Canon Financial Services, First Citizens Bank, DLL, Macquarie, U.S. Bank and PEAC Solutions—among his company’s portfolio. It provides more options to address client needs, as the lessors don’t all share the same level of risk tolerance. Pitassi will also take on some risks with in-house financing, but the sheer volume of traditional options reduces that frequency.

The beauty of an independent leasing company, Pitassi notes, is its ability to provide an end-user client more credit without infringing on its credit line. The monthly payments are far easier to reconcile than a large expenditure that impacts cash flow or the bottom line all at once.

“We can break out the costs; there are different components that make up the total payment,” he said. “But I think a lot of customers just want to understand the technology. Leasing is an ingredient of a transaction, but solving their problems with technology comes first. Figuring out a way to finance it is secondary.”

As interest rates continue to climb or remain high, Pitassi notes that credit approval percentages in certain verticals have fallen, which can represent an obstacle to completing a deal. Then it becomes a risk proposition, one that POA has been able to “conquer at a really high percentage,” he added.

Leasing is an ingredient of a transaction, but solving their problems with technology comes first. Figuring out a way to finance it is secondary.

– Doug Pitassi, Pacific Office Automation

Pitassi has rarely been risk-averse and is a strong judge of situations. “There are some customers that have a legitimate reason behind why they’re in the condition they’re in,” he noted. “If you understand their business at a deeper level, you can take on some of the risk with them.”

However, there was one time when Pitassi freely admits to a credit misjudgment. It wasn’t long after 9/11 that a newer online company wanted POA’s help in closing out a $300,000 deal. He demurred, not wanting to take the risk on a company that, at the time, couldn’t get credit approval for a $10,000 copier. Pitassi regrets the missed opportunity to partner with a company that now has a market cap of $15 billion, evidence that misjudgment swings both ways.

Foundational Element

Leasing is the backbone of business, notes Josh Salkin, a partner with EDGE Business Systems in Roswell, Georgia. The beauty is that it helps clients obtain the necessary solution without the need for a large upfront cash outlay. It also prevents the feeling of being stuck with depreciating assets.

“If sales and service is supporting the client correctly, it’s a natural conclusion to approach expiring leases as an opportunity to discuss options,” Salkin said. “These include purchase of the existing device, refinancing the device for an extended term as well as upgrading to a new generation. With prospective accounts, we try to educate the client on using manufacturer programs/promotions to offset the remaining stream of payments owed.”

Little considerations can translate into huge headaches, and it falls upon the dealer to make sure even the smallest of details aren’t missed. Something as simple as clients notifying the incumbent leasing company as to not get caught in a 12-month auto renewal. Closing the book on the previous agreement can sometimes get overlooked, according to Salkin. Failure in this area can lend itself to unnecessary fees from return shipping, restocking, auto renewals and extra payments.

Nothing is more disappointing to the rep working the deal or the client who thinks their lease is up than to find out the perceived term is actually further out.

– Josh Salkin, EDGE Business Systems

One tactic Salkin’s competitors use is the promise of upgrades early when the actual lease term far exceeds the commitment term. “Nothing is more disappointing to the rep working the deal or the client who thinks their lease is up than to find out the perceived term is actually further out,” he added.

Dealers such as EDGE obviously want to take all strides to help credit-challenged prospects secure feasible leases. Leasing partners may ask to speak to the client to gain more insight into special circumstances. It might require a down payment or opting for a pre-owned device to mitigate the degree of funding needed. EDGE’s in-house leasing arm provides another outlet to support given verticals or new businesses.

Customer-Centric

A majority of the term contracts chosen by clients of The Swenson Group (TSG) of Livermore, California, cover five years, yet about 70% of them don’t reach the full 60 months, notes President Dean Swenson. Roughly 95% of deals are fair market leases, as he finds most clients don’t want to own the equipment after five years. TSG reaches out at least a year in advance of the lease’s end to reassess where the client stands and make tweaks for the next agreement.

Virtually all deals are bundled with volume minimums, with the possible exception of commercial printers obtaining production machines. There’s the scourge of manufacturers who try to sell customers on the zero minimum concept—pay for what you eat, so to speak. Swenson will humor any client who wants to go that route, but he strenuously points out the dangers in variable pricing, such as separate leasing company bills and service charges. The variable monthly charges are unpredictable and are usually a headache for a client’s accounts receivable department.

“Bundling contracts is fundamentally good for the customer, and it offers a defensive posture when competitors try to buy us out,” Swenson said. “Most want a single invoice that’s predictable, and we can put together a flexible allowance that’s all-inclusive.”

TSG takes a consultative approach with prospects, educating them about lease notification periods and letters of intent so they don’t unwittingly get ensnared in a renewal. By doing this, organizations then have an even playing field when evaluating different vendors. If they fall victim to auto-renewals, often an organization gets “stuck” in a bad situation.

Bundling contracts is fundamentally good for the customer, and it offers a defensive posture when competitors try to buy us out.

– Dean Swenson, The Swenson Group

It’s par for the course for a dealer whose intention is to do right by the customer. “Some might say I’m crazy; we are very transparent and use fact-based data,” Swenson said. “We’ll spell out how we came up with the buyout, and we’ll put the dollar amount right in the proposal. So they’ll know the exact dollar amount of the check we’ll write to help them fulfill their [incumbent] contract. Not every dealer is that transparent, and many times it ends up biting the prospect.”

It’s due diligence that enables TSG to successfully guide clients and prospects through the leasing process. If the prospect believes the expiring pact is a strong jumping-off point, the rep will ask for copies of that pact’s terms and conditions and the last three maintenance invoices. That can help TSG craft the most accurate proposal and give the best counsel. When the prospect drags feet, however, it can make the dealer question their intentions and how serious they are about making a change.

“That can disqualify them for being a good fit with us,” Swenson added.

Bundle and Save

With a respectful nod to Flo, Progressive Insurance isn’t the only business partner that wants to help its customers bundle its assets into a single contract to secure cost savings. MTS Office Systems typically offers an all-inclusive approach similar to a subscription-based model. Mason Smith, president and CEO of the Greenville, South Carolina-based dealership, notes his account reps seek to combine the equipment and service packages into a plan customized to each client.

“If the prospect is currently in a lease, our sales team will provide a full total cost analysis with their current costs and our proposed costs,” Smith said. “We try to right-size their service plan to updated volumes and offer flexibility to change plans throughout the leasing cycle.”

Lease terms yield the most frequent inquiries from prospects, according to Smith. Some will request a three-year term instead of five without understanding the cost implications, thus MTS’ reps lay out the full slate of options to determine what works best for their needs. To allay any concerns, the dealer provides a life-of-lease replacement guarantee for customers who opt for a lease with a maintenance agreement.

One clause that tends to catch the client’s eye is the stipulation that prices can increase at any time. “In that scenario, we’ll let them know exactly what it means and how it affects them, and we can put into writing what their service agreement will look like moving forward if it’s billed with the lease,” Smith said.

We try to right-size their service plan to updated volumes and offer flexibility to change plans throughout the leasing cycle.

– Mason Smith, MTS Office Systems

Internal leasing is generally the final bullet in MTS’ arsenal if the dealer has confidence in the prospect’s ability to pay. A hybrid option is to offer a two-year term, then revisit the client’s credit report. A 12-month deal is also possible in these circumstances.

Risk-Reward

A pro-bundle advocate is NBM Inc. of Burlington, Massachusetts. The deals can include multiple units, service agreement and competitive buy-out. Fortunately for NBM, notes Vern Hydorn, senior vice president of sales, the maturity of the industry and the pervasiveness of leasing with established businesses means fewer clients require hand-holding during the process.

Still, the new business space is bustling. According to the U.S. Census Bureau, a record-setting 5.4 million businesses were launched in 2023, and in general, new business growth has spiked in the aftermath of the pandemic. Each year, an average of 4.7 million new businesses hang their shingle, and for a significant portion, automotive leasing may be the extent of their experience in financing.

New businesses and certain sectors can be problematic, according to Hydorn, and while venture-backed firms make for compelling arguments, the garden variety entrepreneur may need to bring a personal guarantee to the table. “Here in New England, there are a lot of companies in the biotech space,” he said. “We have conversations with leasing companies about them. Maybe the company is only 18 months old, but they’ve secured $50 million in venture capital. That makes it a worthwhile investment for leasing companies.”

It’s just like the insurance business. You can win 199 times and lose on the 200th one. You can never predict which one is going to end up being a bad decision. And you certainly can’t predict that the day you make the [approval] decision. It just comes with the territory.

– Vern Hydorn, NBM Inc.

When the traditional lessees can’t commit to a risky account, NBM can turn to its internal leasing firm. The caveat: the prospect needs to have a good backstory or a degree of knowledge or familiarity about the account. NBM won’t approve all leases, and in some cases, the dealer has made the wrong call on a prospect.

“It’s just like the insurance business. You can win 199 times and lose on the 200th one,” he said. “You can never predict which one is going to end up being a bad decision. And you certainly can’t predict that the day you make the [approval] decision. It just comes with the territory.”

The in-house arm represents only five percent of the company’s total lease portfolio. Even more miniscule is the degree of charge-offs from clients unable to meet the terms of the agreement.

Disappearing Act

Another dealer that blends its traditional leasing partners with its own leasing company is Plus Inc. of Greenville, South Carolina. The in-house portion is less than 10% of all leases, and about 60% of copier business is done through leasing. However, the days of account reps flipping an expiring agreement into a new one is dwindling, according to President David Carson. The landscape has changed significantly since the pandemic, he says. Certain manufacturers aren’t updating models as frequently; the same SKU might be offered for five or six years. Thus, there’s not as much excitement about the “latest and greatest” models, Carson said.

“Leasing, for us, just isn’t as critical as it used to be,” he said. “Conversations are more along the lines of ‘Do you want to keep what you have and buy it out?’ If their machine is running well, why would they need the new model?”

In fact, Carson sees more and more companies eschewing leases in favor of cash purchases, then adding the service pact. At the time of this interview, Plus was in the process of upgrading a new university, having taken over the account from the incumbent manufacturer direct. The school had done an extension during the pandemic and opted to pay cash for everything.

Conversations are more along the lines of ‘Do you want to keep what you have and buy it out?’ If their machine is running well, why would they need the new model?

– David Carson, Plus

“They looked at how much money they spent during seven years of leasing and noted how the equipment was still working well,” Carson said. “They didn’t want to waste a lot of money on a lease.”

Carson admits it might hurt his company to not push leases as aggressively as most dealers, but notes that Plus makes the most profit through service. The longer the machines remain in field, the greater the profit when factoring in rate increases. Leasing, he notes, provides an opening for competitors to come in as the low-cost provider.

White Glove

Like many dealers, Budget Document Technology of Lewiston, Maine, has a twofold approach with customers—one for incumbents, the other for prospects. As an existing client’s pact approaches renewal, account reps can consult their quarterly business reviews, discuss some of the newer offerings and determine if there are any major changes in the workflow. If the account’s activity is fairly static, the rep will offer a proposal. According to President Tom Ouellette, while the dealer doesn’t break out the individual charges, it will share the service rate in a bundled proposal.

When it comes to prospects, much of the same applies, but with a deeper dive into the environment. The reps can help assess current machines and talk about some of the applications on the Budget vendor’s unit. The dealer also requests a copy of the existing lease, and Ouellette stresses the importance of walking them through the process.

“It’s a hand-holding process for new customers, especially the smaller SMBs,” he said. “When it comes to larger clients, most of them know the process. We pride ourselves in offering white-glove service—we handle the logistics of shipping back the old equipment—to the point where the client doesn’t have to do anything.”

We pride ourselves in offering white-glove service—we handle the logistics of shipping back the old equipment—to the point where the client doesn’t have to do anything.

– Tom Ouellette, Budget Document Technology

Once the rep has a strong indication that the prospect will do business, a credit check is run to ensure there won’t be any stumbling blocks such as bankruptcies or payment delinquencies. While the reps (and most customers) have been through the process countless times, some newcomers to the leasing game may question terms and conditions, such as what a documentation fee entails. Borrowing from the auto leasing analogy often helps rookie clients better understand the process.

Budget runs 85% of its deals through GreatAmerica Financial Services, with Xerox Financial Services and U.S. Bank as secondary avenues to financing. One thing that’s changed is the company’s in-house leasing program, which has evolved into a rental agreement. Used/off-lease/refurbished gear is available to the most credit-challenged clients on a monthly rental basis, and in the event the client can’t pay, it’s much easier for the dealer to just pick up the machine.

Closing Out

In the world of leasing, it can often be the most simplistic elements that bog down a deal, according to Travis Lemke, vice president of leasing for Gordon Flesch Company (GFC) in Madison, Wisconsin. As a lease is a legally binding pact, ensuring that legal entity names and associated information are provided can help the paperwork get processed in a timely manner.

As for helping credit-challenged prospects find their way into a lease that’s satisfactory for all parties, there are a number of factors that may or may not provide room for creative or flexible programs. The degree to which the prospect is hampered by the credit report can foreshadow any wiggle room GFC may be able to offer.

“Generally, we’re always willing to look at any potential deal and see what we can do, given the situation,” Lemke noted.

As any changes [to Ts&Cs] take some amount of time, the sooner we’re aware of the requests, the better we’re able to manage the process.

– Travis Lemke, Gordon Flesch Company

It’s not very often that a client wants to take a red pen to the contract offer. Lemke points out that GFC leases are comparable to industry agreements, but in those instances when changes are requested, it’s generally a quick process to reach an agreement on mutually beneficial language.

“Some though, are more in depth and require legal expertise.  As any changes take some amount of time, the sooner we’re aware of the requests, the better we’re able to manage the process,” he said.