A New Lease On Financing
Leases offer mutually beneficial options for both VARs and end users

By Lisa Meyer
VARBusiness
- 11:39 AM EST Tues., Feb. 04, 2003

Ellis Posner, CEO of Los Angeles-based VAR TechprodX, learned the hard way that the complexity of a lease sometimes defeats its purpose: to increase a VAR's cash flow.

"A lot of people have to sign off on it in order for the VAR to get paid," he says. "It's more difficult to collect."

Indeed, time is money, especially in today's capital-constrained era. "The survivors in the leasing industry know that they need to be flexible," Posner adds. "VARs are working under difficult challenges now."

For that reason, many VARs now offer financing to their customers. During the late 1990s' technology boom, it seemed that end users couldn't throw away equipment quickly enough. Now, demand has decreased and VARs are searching for different ways to drive revenue. And charging a payment rather than a large up-front fee often closes the deal.

"If you don't offer a leasing option, it can drag the sales cycle," says Boun Senekham, account manager at Pineville, N.C.-based VAR Systems Express. "It's also a way to preserve capital."

This factor applies to both end users and VARs. Financing allows solution providers to overcome budget limitations and conserve credit lines by basing approval of leases not on their own credit, but on their customers'. The leasing company takes on the risk of obsolescence and the cost of disposal. Leasing also helps VARs identify and nurture relationships with a company's financial decision-makers, not just its IT directors.

A master lease can help VARs manage customers and minimize competition. Once a master lease is in place, for example, it can be used for future projects and upgrades.

"You have some term that you have a guaranteed relationship with a customer, as opposed to a contract that is over once you have delivered the equipment," says Cathy Boleyn, COO of Manassas, Va.-based Government Micro Resources, a VAR that does much of its business with government agencies. "The lease gives you a leg up on follow-up business and makes you aware of what is occurring in the agency."

Even though the VAR doesn't receive any tax benefits, an operating lease allows customers to expense payments rather than capitalize purchases,especially beneficial to publicly traded companies that prefer to keep such debt off their balance sheets. Reporting equipment as an expense lowers a company's federal income tax.

For example, renting or leasing equipment avoids the Alternative Minimum Tax (AMT), which ensures that profitable companies pay income tax by increasing taxable income. The law requires that a company compute its taxes twice,once using the regular method, which has a maximum 35 percent rate, and again using a 20 percent rate,while adding certain tax-preference items to the income, which include accelerated depreciation on capital assets. Depending on how they are structured, leases also can improve a customer's return on assets and equity. Such advantages for end users are selling points for VARs.

But, as TechProdX's Posner realized, a poorly constructed lease can undermine those advantages. Moreover, fast-talking financiers offering myriad leasing options can be confusing to VARs.

Here are a few tips to help you navigate the process.

Do your due diligence. Pick your financier carefully. There are many dishonest people out there. Consider working with either a large, established company that has minimized the paperwork, or a smaller, hungrier competitor that may offer you a deal and access to top personnel.

In any case, be sure to work with credible financial institutions that will service leases throughout their terms. Avoid companies that may sell payments to other financial institutions. You could end up not knowing who is servicing the lease.

"The VAR needs to perform the same due diligence on a leasing company that an end user does with a VAR," says Jay Axelson, vice president at Walled Lake, Mich.-based Varilease Technology Finance Group, an equipment financing, sales and service provider. "Any discomfort an end user has about a lessor impacts the VAR."

In addition, search for a financier with quality customers. Sometimes the lessor gives you business. "We often bring VARs into our transactions to source equipment for our end users," Axelson says.

Finally, check into a financial institution's track record. You want to be paid in a timely manner. "What you need in a financier is fast approval, fast documentation time and fast payment," Systems Express' Senekham says.

Be sure the leasing company understands the technology market. As more companies outsource their IT departments, an end user may want to finance technology located in offices other than their own. Leases must accommodate such possibilities.

Leases should also allow for regular upgrades of equipment. Such agreements benefit VARs by locking them into customers' acquisition strategies.

"The economic life of IT equipment is getter shorter and shorter," says Ralph Petta, vice president of industry services at Equipment Leasing Association, Arlington, Va. "The average lease used to be for 36 months. Now it's for 18 months to 24 months with options to upgrade."

If a customer ends a lease and returns equipment, the agreement should prevent the end user from procuring the same equipment from a competitor. That way, if the customer wants to upgrade, they'll do so through you. Alternatively, the lease should include a trade-in fee for a competitor's equipment.

Keep in mind, if a lease includes technical support after equipment is delivered, a VAR remains in contact with the customer, increasing the likelihood of spotting and fulfilling future requests.

Clarity is key. Leasing entails a lot of terms and conditions, and it's important that both a VAR and its customers understand them. "The greatest nightmare for a VAR is to partner with a financing source that puts lease documents in place that don't help end users," Varilease's Axelson says.

Vague language or unexplained clauses can catch customers by surprise when they receive unexpected bills. Any subsequent hardship between customers and financing companies can, in turn, damage a VAR's reputation.

Some of the most important terms and conditions that you want to make sure your customers understand include interim rent, deposits, automatic extension periods and fair-market value. Interim rent has to do with clarifying whether customers are charged extra days if a lease states that it begins on the first of a month, for example, and equipment is delivered early. You will also need to be clear about what happens to a deposit collected before a lessor does a credit check. Is it applied to the customer's first payment? Does the customer get the money back if it rejects the lease?

Typically, customers who want to return equipment at the end of a lease must notify a lessor before the agreement expires. If the end user fails to tell the financier and an automatic extension is in place, the lessor automatically extends the lease,typically for six months to a year.

Fair-market value is generally defined as how much a willing seller charges a willing buyer. But lessors often revise that so that it puts them at an advantage. Make sure you understand the nuances of the definition as it is worded in your customers' contracts. This point, too, can come back to haunt you if customers find out they are paying too much.

Keep in mind, end users who can't understand documentation may just ignore it, which could keep the leasing company from paying you.

"One of the most common pitfalls in the leasing business is documentation issues," says Lino Martin, vice president at technology distributor Ingram Micro. "You have to have a certain amount of paperwork in place and, often, personnel who don't deal with such documents often get stuck on them."

Insist on flexibility. Don't settle on a financier that offers only a few pre-established options. Customers' needs come in many forms. Be sure your financier will tailor leases to those needs. Start dates, payment dates and payment methods should all be negotiable.

"Customers have different requirements," TechprodX's Posner says. "Inside delivery or delivery to dock? The financier must understand the end-user environment and accommodate the customer."

Work with more than one financier. Consolidation in the financial services industry is causing some instability among lessors. Don't depend on just one,or you could put a deal at risk.