There are two options in all competitive, FMV lease buyouts. The first is described as an upgrade to keep; the second is an upgrade to return. There is NO option described as "Payment Stream Buyout to Store in Warehouse."
Last week on, "The End Of The Day With Ray!" I discussed in a couple videos the insanity of storing customer's leased equipment in offsite warehouses through the remaining term of the lease. The practice is known as "Payment Stream Buyouts." Here are the links to those two episodes.
Leasing truly transformed the industry. However, leasing has also made the industry very vulnerable to disruption as many of the outdated equipment reseller's practices regarding leasing are quickly getting out of sync with today's buyers.
Unfortunately, without the lessor's permission, this practice violates every lease agreement in the industry. I would conclude there are few written agreements between lessees and lessors, allowing this practice at all.
So, why is the Payment Stream buyout done?
It's all about the quest for gross profit. For the last four decades, the document imaging channel has leased to help its end-users acquire equipment through a monthly payment over a lump sum cash payment. At the birth of leasing, the industry quickly started selling monthly payments.
The lease typed used to commence an agreement is driven by gross profit, and that decision is also the dealer's motive when the lease is upgraded because, as with most things. It's about the money. There are many ways to construct an agreement between a buyer and seller in the document imaging channel. This article discusses the most widely used lease in the industry, The FMV (Fair Market Value) Lease. The second most common is The Dollar Buyout Lease.
The FMV Lease will always have a greater buyout obligation then the Dollar Out Lease. I will explain the reasons why. It will be in these reasons where the motive to store equipment in warehouses lies. This description applies to competitive upgrades—a replacement of one vendor with another.
The FMV lease includes a residual value because its interest rates are lower than a Dollar Buyout Lease, which has no residual value other than the stated one dollar. So, why don't sellers use the dollar buyout lease? After all, the buyout on the dollar buyout lease is clearly defined. So, the dealer can pay off the remaining payments and return the equipment. No reason to store equipment.
Paying off FMV Leases by providing the customer a check to make the remaining payments and storing their leased equipment allows the upgrading seller to lower the buyout cost, which then is added to the new lease.
All FMV Leases have a residual value; it's this residual value and interest on the payment, which provides the lessor profit on the money it lends to the lessee to purchase the equipment.
The number one reason a seller uses the FMV lease is that the industry sells based on monthly payments and FMV leases have lower rates meaning a predetermined monthly payment will fund more to the seller.
At the FMV Lease commencement, the sellers are happy, at the buyout of the FMV Lease the sellers complain. Leasing is like all things; you can't have it both ways; there must be a balance.
The motive is in the math.
Using a monthly lease payment of 400.00 per month. Here's an example of the difference in funding to the seller between a Dollar Buyout Lease and FMV Lease. It all starts with the lease rate. Ok, first, I will say it does not matter if your lease rates are lower. What matters is the swing between the two rates.
Dollar Buyout 60-month lease rate .0205 meaning a $400.00 monthly payment would fund the seller $19,512.20
FMV 60-month lease rate is .0185, meaning a $400.00 monthly payment would fund the seller 21,621.62
So, clearly, the amount funded is more by using the FMV lease vs. the Dollar Out Lease. This amount is quite substantial; think about the dealers selling multiple deals a month. Even those smaller dealers strapped for operating cash will also rarely ignore the opportunity for t increased revenue by using the FMV lease.
Nearly all of the sales representatives of the industry are commissioned on gross profit. So, in this example, you can clearly see that the sales representative using the FMV lease would, in essence, have an additional $2,109.42 Gross Profit. It would not be unlikely that the sales representative earns a 40% commission on gross profit. So, the decision to use the FMV lease rewarded them an additional $843.78.
You can see the benefits of increased revenue at the commencement of an FMV lease are driving the behaviors of its use. The sellers can not have it both ways. If the seller wants a lower buyout, the seller must accept a lower funded amount; it is that simple. Of, course the industry's obsession to prematurely upgrade leases in another problem.
Worth repeating, There are two situations in all competitive, FMV lease buyouts. The first is described as an upgrade to keep; the second is an upgrade to return. There is NO option described as "Payment Stream Buyout to store in a warehouse."
Leasing is a big part of the industry's deliverable, and there are many components and complexities to leasing. Dealers have program agreements with the Lessing companies they use. These programs are put in place to provide both expectations and competitive protections. One of the things the industry needs to evaluate and seriously consider changing is how it deals with competitive upgrades.
The time has come for more cooperation when one dealer replaces another. If a non-incumbent dealer displaces that dealer and uses the same leasing company, the new vendor should be afforded the same discounts as the incumbent would receive. Dealers should be happy to agree to this. The whole industry continues to proclaim its tremendous value and customer relationships. Thereby there should be no need to have rigid financing structures designed in a different era to apply today.
The industry's end-users are beginning to discover alternatives to the old ways, once benefiting both end-users and dealers. However, like all things, improvements for continued relevance must be embraced, not fought against.
The entirety of the industry knows that if things sound dysfunctional, they are generally dysfunctional. Describing to anyone in the industry or out of the industry, the Payment Stream Buyout processes everyone would agree sounds insane and dysfunctional.
Unfortunately, some believe there is nothing insane about it. For them, I suggest they truly understand the ramifications. Leasing companies have the right to inspect the assets at the lessee's location. If they discover that the assets' leased was removed from the lessee site, they have the right to demand the lease to paid in full immediately.
As an industry, let's redefine outdated processes using customer-centric motives over any motives to continue doing what we know must be changed.
Over the next couple of years, the industry will face many challenges; however, those challenges should be cause to reimagine what could be based on what should be.
It's time to buyout dysfunctions and upgrade to relevance.
"Status Quo is the killer of all that will be invented."
CEO/Founder TEASRA,The Innovation Channel and Host of The End of The Day With Ray! https://www.endofthedaywithray.com/
I welcome everyone to subscribe to my YouTube Channel https://www.youtube.com/channel/UCULKZDBCR1ozWXmu4Tob66A?view_as=subscriber
If not already Let's connect here on Linkedin
Comments will be approved before showing up.