Sales Make it Happen
Vary the Lease Structure to Accommodate Customers Needs
By Terry Winders, CLP
Today, customers want to match rentals to the true use of the equipment and to match the timing of rentals to the income generated by the equipment. They also are using the rent expense to control the income statement and tax obligations. Therefore, a lease salesperson needs to vary the lease structure to meet the customer's needs. The old 36,48, 60 month schedules no longer work. If the lessee is going to expense the rents for book and tax accounting, it seems appropriate for it to take the expense when it receives revenue from using the equipment. Therefore you need to ask questions on how the equipment is going to be used and create a lease structure around the answers.
First question: What time of the year is the best for you to exchange equipment and be the lease disruptive to your business. This may give you a termination date different than what 36,48, or 60 months would give you. Or, they may have a seasonal business that requires different lease payments each month of the year.
Even if the equipment does not lend itself to operating classification for GAAP accounting (rents expensed as paid) having the lease payments follow the revenue stream makes the "cash" for payments easier and makes collection less of a problem. Having level payments that have no regard for the lessee's cash flow or revenue recognition is not providing the correct structure.
The more structure you provide the more the discussion revolves around the benefits leasing offers instead of comparing your rate to the competitor's rate. Remember to adjust for Seasonal cash flow, accommodate for increasing maintenance expense by stepping down the lease payments over time, offer floating skip plans to cover unusual revenue variations, or lowering the first six months lease payments to allow the equipment to become producing prior to full payments and tie the term to the actual period of use.
For companies whose sales and collection effort are not seasonal or constant, irregular rental schedules can be planned to match payments to uneven cash flows. Some firms have definite strong and weak times of the year, A rental structure to accommodate their fluctuating cash flows ensures that they will be able to make payments without increasing costs by drawing down an operating line of credit, for example. These programs are becoming very popular and are easy to arrange if the customer can provide data about its revenue stream. When making this sort of lease, it is important not to be mesmerized by sales figures. Sales generate paper profits, but the collection of sales provides cash to meet obligations.
Structure requires you to always propose what the customer asked for as plan A but if you ask the correct questions you may be able to win with plan B or Plan C, if it gives the customer a better match up to the real world of cash flow management.
Terry Winders, CLP
Lease training and Consulting