Equipment Leasing: The New World of Hybrid Financing

As the economy has been involved in its gyrations over the last three years, there have been some significant implications for distributors when it comes to offering financing options to customers.

Industrial Distributors
When it comes to distributor financing programs, one usually thinks primarily of equipment distributors. However, industrial distributors often also offer certain types of financing to customers. One such distributor is Barnes Distribution (Cleveland, Ohio).

“We will provide a lease option to customers for our proprietary key cutting and key duplication equipment,” reports Jim Laprade, director of business development. “Beyond that, with vending solutions, we also offer some options for leasing arrangements.”

In terms of customer binning programs, some distributors actually charge for equipment. Barnes also offers this option. However, in some cases, it will provide equipment to customers with a “no charge” agreement.

“This is basically a loan, so the customer doesn’t have an up-front cost of converting to our system,” explains Laprade. “With 55,000 highly-consumable (high turn and low value) maintenance and repair items, they all need a home.”

Equipment Distributors
For equipment dealers, of course, financing is a much bigger part of the picture, and this is certainly true for material handling dealers. Front and center these days is the fact that, in the future, there are some regulatory changes coming that will affect the accounting structure of leases on customer books. These assets will end up needing to be on the balance sheets. With leasing being such a big part of dealer financing options (along with rental and outright purchase), these accounting changes are likely to have an impact. Just how significant will those changes be?

“As part of the services we offer, we own and operate an internal finance company,” reports Bill Buckhout, marketing manager for lift truck manufacturer Raymond Corp. (Greene, N.Y.). “In terms of the new accounting rules, the intent is to make financial statements reflect reality. Hiding some long-term liabilities off-balance-sheet using leases is going away. As a result, I foresee that customers who view leasing strictly as a method of taking the assets off their books will no longer see this as a relevant strategy.”

Still, though, Buckhout believes that leasing will continue to be attractive for other reasons, especially as it relates to providing very flexible, uniquely-tailored financing to customers.

“These days, customers are looking for hybrid financing solutions that lower their costs and better manage their fleets that are different from the standard 36-, 48- and 60-month leases or from the weekly, daily and other short-term rentals,” he explains. In sum, financing these days must be very customized to individual customer situations. For example:

● In the past, Raymond would put all of a customer’s lift trucks on a 36-, 48-, or 60-month lease because it had been traditional for some customers to replace their entire fleet at one time. “We are now showing these customers that this probably isn’t the best strategy," Buckhout states. One reason is that, typically, no two trucks will operate the same, even in the same facility, so offering a cookie-cutter lease solution is not going to be their lowest-cost option. “With our fleet management software, we can offer lease terms based on truck usage,” he says. “One example might be a 42-month lease.”

● A lot of customers have a core fleet of lift trucks that they use year-round at a regular clip. However, when they have seasonal peaks or other demand blips, the traditional solution has been to do some weekly or monthly rentals. “These days, though, as a result of better fleet management software, we are able to provide customers with much better information about their individual fleet needs,” Buckhout explains. “For example, we can quantify and forecast exactly what their seasonal needs are going to be. Then, as part of their total lift truck package, we work with them on a core fleet of trucks and a seasonal fleet of trucks and can offer a lower total price.”

● Another change has been the introduction of usage programs. Customers want the low price of a lease with the flexibility of short-term rental. That is, they want a short-term rental structured approach to material handling. “They are changing warehouses every year, shipping different products, and so on. ‘Sameness doesn’t happen anymore,” Buckhout points out. “Things are changing too quickly.”

Tina Goodwin, director, financial services, for lift truck manufacturer NACCO Materials Handling Group (Greenville, N.C.), agrees that the new accounting rules will have some impact on leasing, but won’t completely change the landscape. “The focus is definitely still on leasing,” she states. “We provide leasing to both Hyster and Yale dealers and their customers, and we had our biggest year ever as far as the percentage of our business being true leases. One reason was the customers didn’t want to tie up their cash by buying trucks in 2009 and 2010.”

Another advantage was the opportunity to engage in off-balance-sheet financing. “However, due to coming changes in accounting standards, the equipment may eventually have to be classified as assets on the books,” she admits. “This may cause some customers to change their philosophy, but I believe that large customers, especially national accounts with large fleets, will still do true leases in order to take advantage of leases, rather than buy outright.”

According to Goodwin, when customers lease rather than buy outright, they turn lift trucks back in and get newer equipment, which improves productivity and reduces maintenance costs. However, she believes, customers with smaller fleets of five to 10 trucks may decide to purchase outright rather than lease due to the new accounting standards.

The best approach for material handling distributors? “We train our dealers and their salespeople to focus on monthly payments rather than on sale prices when talking with customers,” continues Goodwin. “If the customer truly wants to pay for utilization, then the sale price of a truck really doesn’t matter. The focus should be on the monthly expense of utilizing that truck.”


William Atkinson is a freelance writer specializing in supply chain management.

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