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| January 09, 2001 Granieri
Associates Seminar Dates and Cites West Tues,
Feb 6, 2001 - Long Island, NY Topic:
Lease Marketing Strategies. All
members of the NAELB, EAEL, AND UAEL, please take a $25.00 discount per registration.
Highlights
For more information: Granieri Associates: A leader in Lease Education for over 25 years.
Presents (Intense One-day Seminars For New or rookie salespeople on Marketing and Selling the Equipment Lease. Target Topic: Lease Marketing Strategies. Target
Times: 9:00-4:30 PM Seminar
Highlights Icing
on The Educational Cake No
audio or video taping of seminar permitted. ( We do accept substitutions, Faxed registration is considered a contract and the no cancellation clause applies.) ------------------------------- Registration Form ------------------------------- Name________________________________________________________________________ Company_____________________________________________________________________ Address______________________________________________________________________ City__________________________ State______ Zip____________________ Phone________________________ Fax __________________________ e-mail__________________ Visa____ Master Card____ American Express_____ Check_____ Amount $ ___________ Card Number______________________________________ Exp. Date _________ Signature_________________________________________ ( Please do not print ) The completed order form must be mailed or faxed with all Credit card orders.
Mon, Jan 22, 2001 - Irvine, CA___ Granieri
Associates
The
Lease Closer November/December 2000 Inside this issue
The Articles in this newsletter do not necessarily represent the views of Granieri Associates but the views of the writers themselves. If you would like to comment on a particular article please call Granieri Associates during their normal business hours (9:00am-6:00pm EST) Spotlight
Table of Contents A
practical discussion of credit bureaus and their scores
..2 Nov/Dec 2000 The Lease Closer Page 2 A practical Discussion of Credit Bureaus and their Scores By Linda Kester *This is a continuation of Linda's article from the Sept/Oct issue of the Lease Closer. As I mentioned above, the credit bureau scores will not tell you the probability that your lessee will default on their lease. They do tend to rank order small ticket leasing customers in terms of probability of default if other factors are equal. That means that if other factors are similar, a customer who scores a 620 should have a higher probability of default than someone who scores a 630. It does not mean that someone starting up a restaurant and has a bureau score of 660 has lower probability of default than a doctor who has owned a medical practice for 15 years and has a bureau score of 650. Once you accept the fact the scores do a good job of ranking ordering your customers (you should verify this independently) you can take advantage of the value of the scores. If the scores work and you use them properly you should be able to increase your approval rates, lower your loss rates or a combination of both. Other benefits of relying on scores are as follows: More objective decision making, faster decisions, measuring application quality from your sources, forecasting loss rates and risk adjusting pricing. Credit scores, particularly those not designed for your business, do have weaknesses. The Fair Isaac bureau scores weren't designed to predict business failures and certainly not leasing Nov/Dec 2000 The Lease Closer Page 3 defaults
although they happen to be a valuable tool for both in our line of business. They also don't predict capacity. Just because a small business owner has a very good score doesn't mean the business can handle a $500,000 lease. At that level you are probably better off learning what the lease is for and what source of repayment than relying on bureaus scores alone. Bureau scores also do not prevent fraud. You can get in trouble if you rely on them to heavily and do not keep the same fraud prevention techniques you had before. There are two areas where, in my opinion, the bureau scores do not do a good job as they do in other areas. First is when the company is larger. The larger the company the less its behavior mirrors that of its principal and therefor, the less predictive the scores. The other areas is when the principal of the business is wealthy. A lot of small business owners are wealthy, some very wealthy. Wealthy people often behave differently in many areas, including how they handle their personal finances. For example, if a wealthy person has some slow payment patterns on his credit bureau it could be that it he just never got around to it or even that his personal assistant who pays all his bills was on vacation for a week, not that he was short on cash that week. They also tend to have different types of revolving lines and often more inquires than the typical person for which the bureau scores were designed. After the score, what else do I look at ? Even if you have the score, there are other parts of the consumer credit bureau that provide information which can be valuable but also misunderstood or used incorrectly. Nov/Dec 2000 The Lease Closer Page 4 One of the first things you will see on a credit bureau is the consumer identifying information. This will typically include information such as name, address, previous address, social security number, employer as well as some other personal information. Be careful when using this information. Much of it is often updated by both trade tapes and inquires and therefore is not always accurate. The fraud alert section of the bureau is one that you should pay more attention to especially since the scores you are using are not designed to prevent fraud. The alerts vary both in terms of occurrences and severity. You have to make your own determination as to how heavily to weigh them primarily because different lessors have different sources of business and different protections against fraud, both contractual and other wise. Typically, I suggest paying more attention to alerts that have something to do with the social security number. The summary section is a bureau option that many subscribers prefer. It is an easy way to grasp much of bureau quickly. I would caution against this, though. If you want a quick easy way to evaluate the bureau, rely on the score. If you want to understand the customer more completely, look at the trade lines. One of the areas in the summary that is particularly misleading is the revolving availability percentage. This is the percent of the line not utilized on revolving credit (typically credit cards). Credit card issuers are inconsistent in how they report credit lines. Some report the line available, some report only the highest amount ever used and some report no line at all, only usage. If someone has a $20,000 line and $5,000 currently out on that line but the amount of the line is not reported it will appear in the summary that he has 0% availability when actually he has 75% availability. Another area in the summary that can be misleading is the real estate balance. As you probably know, mortgage holder does not properly report. Nov/Dec The Lease Closer Page 5 the mortgage as sold or closed, it could appear as if the customer has twice the real estate balance he actually has If you read the trade lines and saw two mortgages for the same amount you would at least suspect the possibility that they were for the same property, especially if one did not show any recent payment history. Read the trade lines! The public records section of a report is one area that always gives people trouble. They are scary looking, especially suits and judgments. There are a couple of things you should know as you look at this section. They are factored in the score. They are less than 100% accurate, especially releases and settlements. Anyone in our business more than a month has had a situation where you told someone about a suit on there credit report and was told that it was released years ago! They also may not be as predictive as you might think, especially for larger businesses and wealthy principals. Suits are part of their lives because they have various complex business dealings and they happen to have deeper pockets. Again, as in fraud issues, you make your own determination about severity, how recent and other data you have on a applicant. The trade lines are the meat and potatoes of the credit bureau. It is where most of the information is derived to form the score and its details outlined in the summary. One area that is important to understand, especially as you look at accounts with a delinquent history is the timing of the delinquency. The trade lines will tell you this. Usually, the payment history, which shows the frequency and severity of delinquent payments will show the payment history backwards from the balance date shown on the report. Nov/Dec The Lease Closer Page 6 This is important to know as the recency of the delinquent payments is vital to your decision making process. Another factor to look at when reviewing the trade lines is the amount and type of revolving credit. Credit departments often look at high revolving debt and utilization rates negatively and justifiably so, but there are exceptions. One example would be two people that have $100,000 in revolving lines and $90,000 in revolving debt. Notwithstanding the possible errors I mentioned earlier in the article, they would both have 10% availability on their revolving credit and both frowned upon by your credit staff. What if one guy had credit cards each almost max'd out and the other had a $100,000 bank line with $90,000 out on it. I would argue that the second guy was a much better credit risk for a variety of reasons. He probably has a legitimate business reason for the loan, is paying a much lower rate and undoubtedly the bank did more thorough due diligence process than any of the other credit card issuer. The trade line section is the area where you can get more details on your customer to do more thorough analysis. Inquires are a part of the credit bureau that can create problems, particularly for a broker as well as for funding source that does broker business. In theory, inquires are factored into the score and should be left at that. In our business, however there is much more to it than that. The funding source is concerned about things like whether the deal is being split and/or how much leasing the customer is getting right now. From the broker's point of view if the deal is declined by someone they should send it somewhere else. That is one of the advantages of being a broker. Also, often they are the leasing source for a lessee that does a lot of leasing and they send the deals to different companies depending on their appetite, deal structure, rates, etc. and they are often penalized because other companies are less than straight forward with their information. Nov/Dec The Lease Closer Page 7 Absolutely none of that is factored into the score and should be evaluated according to your own company polices. As I mentioned at the beginning of the article, I often get asked questions about credit even though I am usually in front of sales and marketing people. Often the questions are about personal credit reports which are frequently used and to often misunderstood. All of this shows that credit is important for sales personnel to understand. Even if you don't have the ability to overturn a decline, you need to explain the decisions to your vendor or your broker and give them confidence to know that you are capable of handling their next transaction. In this article I have touched on some of the issues with credit, credit bureaus and their scores. If you are interested in learning more about how to read credit bureaus, I suggest contacting the bureaus and asking for their literature. I have found it readily attainable, informative and easy to follow. As I touched on only some of the credit related issues that I believe are important to sales professionals in our industry, I would like to welcome questions or comments please e-mail me at www.lindakester.com with your comments or questions. The Lease World The Federal Reserve Board cut interest rates by a half point on Wed, Jan 3, 2001. The New York Stock exchange responded Favorably by gaining nearly 300 points.
It is projected that by the year 2001, almost one-third of all business-to-business
transactions will performed by e-commerce. Nov/Dec 2000 The Lease Closer Page 8 Most small and medium-sized businesses, as well as large businesses, in the United States are using the Internet. Internet use by small businesses is on the rise 47% of small businesses have access to the Internet, 35% maintain a web site, and one in three do business transactions through it.
Medical Computers
Telecommunications
Office Equipment Due to new technology, many office machines are being merged into "multifunction devices" Nov/Dec The Lease Closer Page 9 Funding Sources Web Sites
www.manifestgroup.com The
Changing Industry By
Joseph Bonanno, Esq.
It's no secret that the face of the leasing industry has changed in the last six
months. Many, many funding sources have either decided to or have been forced
to exit the industry. Brokers have stated that their business is down and if it
was not for their loyal vendors and loyal lessees that they would be out of business.
Some brokers have indicated that they are down sizing and others have indicated
that they are looking for full time employees in other industries and will conduct
lease brokering as a part time hobby until the economic climate comes to what
it was. All of the above factors and even more factors that can not be discussed
here, give rise to the question of " What Happened?" Nov/Dec The Lease Closer Page 10 1. Quantity over Quality. In the past few years, the leasing climate can be characterized by the terms "The Roaring 90's" and "Feeding Frenzy" Brokers and funders were concerned with volume and quotas and did not place their concern on credit quality. Things reached a point where the credit culture was to put a deal through, rather than analyze the credit and other aspects of a deal. N my opinion to get deals done going forward, take a long hard look at the credit quality of a lessee, don't look at a lessee as a chance to fill a quota. 2. The Internet. In my humble opinion, the obvious question about the Internet business is what part of one's anatomy is going to be burned first? It's only a matter of time. In my opinion, there is no substitute for personal contact, relationship building, being able to sense something from the tone of a person's voice in a personal conversation. I will admit that the Internet can be used to find new contacts, but those new contacts must be explored on a personal level. Anyone that thinks that they can run a business 100% on their desktop and never need any personal contact is wrong and is destined for failure. Do not make the mistake of thinking that a lease deal from start to finish can be accomplished over the Internet. In my opinion, that is wrong and will cause problems later. 3. Fraud. Learn how to read between the lines. Look at applications, credit references and reports and lease documents themselves in between the lines. I remember seeing a credit application from a carpet cleaning company that was a subchapter s corporation and signed by the "Executive Vice President". What small business cleaning company has an Executive Vice President? Nov/Dec The Lease Closer Page 11 That among other things were red flags and ultimately the deal was a fraudulent deal. In my opinion, try to develop the instinct that is needed to develop a "sixth sense" to detect fraud. 5. Documentation. Recently, I heard that one lessee was please with their leasing company because they presented a "documentation simplification program." Essentially, this meant that only the lease and acceptance had to be signed, no UCC and no personal guaranties. Obviously, if the lessee defaults. The lessor is unsecured and has no recourse against the officers of the lessee's company. To a lawyer, "documentation simplification" simply means that there are fatal defects in the lease transaction that do not protect the lessor, funder or broker and it is only a matter of time until problems surface in that transaction. 6. Advanced Fees. The worst and most common problem in the industry today, involved in this dispute are lessees, brokers and funders, meaning that this issue faces everyone that participates in this industry. Even if the broker and funder believe and maintain that they are entitled to keep the advances, the lessee will always state that their money was stolen from them. As a result, the best case for resolution is litigation. Very simple advice that I have been preaching for about 5 years: All advances go into a separate escrow account, avoiding the commingling of advances with an operating account. Not until the deal is closed are those advances to be deemed earned. In event that the lessee walks from the lease, then either continue to hold the advances pending resolution of the disposition of the advances or a disposition of a lawsuit, if one results. There are such things as documentation fees that can be charged and retained over and above advances. Nov/Dec The Lease Closer Page 12 However, I cannot equate advances with "due diligence" fees for the time spent in the process of obtaining a credit approval. The intent of the parties in this issue needs to be specifically defined in documentation, giving yet another reason why the "documentation simplification program" can cause many problems as well. 6. Marketing. I have seen overly aggressive marketing that has come back to hurt people. If you're a broker, state that you're a broker. If you're a funder, state that you're a funder. Don't state that you're a funder if you're a broker. If you have your own lines, don't say that you have your own money. Remember, lessees are more sophisticated today than they were even 5 years ago. It is very important to be up front and let lessees know whom they are dealing with; other wise they will be able to see through you in one minute. That will not create any good feeling or positive relationships whatsoever. 7. Competition. I've been told by some brokers that they are losing deals to credit cards, that's how tough it has become out there right now. Learn how to market around that. Talk about interest rates, yes interest rates. Credit card companies disclose their interest rates, perhaps leasing companies should as well. Maybe, some people have gone with credit cards because they know what their charges are where they stand with the credit card company as opposed to a lease where all they find out is "this is your monthly payment." Certainly, any leasing company can beat the credit card rates. Nov/Dec The Lease Closer Page 13 The intent of this writing is not to proclaim doom and gloom for the leasing industry. Rather, the current trend in the industry is nothing new. There have always been and always will be ups and downs in the industry. However, one has to acknowledge that it is easier to survive when the industry is "up" rather than when the industry is "down." When the industry is down, it is, it is not as intelligent to be conducting business in the same manner that one would conduct business if the industry were up. Do not play it close to the edge, play it conservative if anything. The cycle will end and the leasing company that has successfully made it through the downward cycle will thrive even more when the cycle is in its upward trend. Attorney Joseph G Bonnano is legal Counsel to the National Association of Equipment Leasing Brokers and can be reached at 781-391-7800 or by e-mail at "attyjgb@aol.com." Structuring to Win COE: $97,000 I=11% N:48 FV: 10% ADV: 1st and last Lessee wants the following payment schedule
$505.00 for 18 months
1. 505 χ 97,000 = 0.00521 Nov/Dec The Lease Closer Page 14 2.
NPV of The known 3.
NPV of The Known 4.
NPV = 13.03075 Sto χ 9 Rcl 9 = 5.91812 5. Check IRR
97,000 - (505+5741) = 90,754 =/- in Top Gun Point: Never take a transaction public without consulting your credit department or your funding source. Nov/Dec Lease Closer Page 15 Internet Data Granieri Associates Web
site
Michael Granieri The
Financial Services Monitor: The Equipment Finance Journal: www.efj.com Other
Web sites worth a visit |
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