Bank equipment leasing is just one of the ways that you can go about procuring equipment for your business.
How Profitable Is Equipment Leasing?
Many companies opt for equipment leasing rather than purchases either by cash or bank loans. This is primarily because leases are cheaper and will enable the company to manage its cash flows as well as operating expenses easily. Also, large capital expenses may also mean you are paying for equipment whose income generation is not justified yet. In the United States, eight out of ten companies lease or plan to lease equipment.
The types of equipment that can be leased by a business is varied from yellow irons, a slang for bulldozers to other earth moving equipment, construction machinery, manufacturing machinery, computers and other technological equipment.
It is for this reason that banks ventured into equipment leasing as another source of business. Before, they primarily concentrated on offering loans for equipment acquisitions. The good run has bolstered community banks and seen many of them even expand their finance activities.
Reasons Why Banks Are Venturing Into Leasing
Apart from the above, that is to get another source of finance, banks are finding a variety of benefits from the equipment leasing business. The other main reason is diversification. The banking industry is flooded with big, medium and small sized financial institutions all offering the same financial products. Most of these products are prone to adverse macroeconomic conditions such as the recent 2008 financial depression when banks with a high concentration of loans in real estate commercial lending faced downtime. Diversification is a way of protecting these banks from risk.
According to ELFA, the Equipment Leasing and Finance Association of America, capital goods and software in excess of a trillion dollars are purchased each year in the United States. More than half of these will be financed through bank or commercial loans, leases and a horde of financial techniques, making it ripe for banks to venture into.
In fact, most big banks have been offering leases for such a long time and have been members of ELFA. Finally, there is demand for capital equipment and software. Many companies put off equipment purchases up to such a time when their cash flow position justifies such a purchase. For the present they will have to rely on leases. This is an opportunity not only for banks but also for other financial institutions.
How Banks Are Managing Leases
There are a couple of ways through which banks can execute their leases. With time most banks opt for more than one strategy. The main strategies available include direct leasing, working with lease dealers and purchasing leasing operations.
In direct leasing, banks deal with the lessee directly and most of the time the bank will have to purchase the equipment in question. There are companies that offer leasing as an option to customers, especially the manufacturer. The financing deal can be arranged by a bank that monitors and execute the deal.
The bank can stay out of contact with both the lessor and the lessee by simply purchasing lease portfolios. These portfolios are made by the equipment leasing companies. The bank will end up being an indirect lender. This situation is synonymous with when banks acquired paper from auto companies. Yet again banks have created their leasing companies or even bought existing ones in an attempt to exclude their banking businesses from leasing operations. Having experienced leasing executives is important and crucial that they manage to stay on even during term of the lease as leasing operations need to be closely monitored.
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Cautions And Pluses
Even though lease operations are lucrative, it is imperative that any financial institution and banks for that matter assess the relevance of this appeal to their own case. Lease agreements will in almost all cases cover full value of the equipment. So while banks are hungry for collateral, this is one area where they may not be fully protected. The key, however, is not to concentrate on the traditional cash flow but rather to find a different service to engage in that can provide a built in collateral as a fallback plan. It is also crucial that the financial institution or bank takes into account that the lease agreement in itself means that the lessee is usually protected from obsolescence.
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