Customized lease banking Featured

8:00pm EDT October 26, 2008

Equipment leasing companies have special banking needs. While most financial institutions attempt to place leasing companies in a regular commercial division, a small cadre of banks provide lease funding solutions specifically tailored to meet the needs of those in the equipment leasing industry.

“Independent leasing companies are a niche type of business,” says Brian Griffin, senior vice president, leasing, for MB Financial Bank in Chicago. “Most banks don’t understand how leasing companies work. Leasing companies have a variety of needs that are specific to their industry. Those needs include warehouse lines of credit, equity lines of credit, equity sharing and debt discounting. MB provides all of these products.”

Smart Business spoke with Griffin about warehouse lines of credit, the advantages of an equity line of credit and the importance of working with a bank that understands how leasing companies operate.

Why do businesses typically choose to finance equipment?

Businesses often choose to finance equipment because it’s a large capital expenditure and they don’t want to lay out large dollar amounts upfront. A lot of larger companies’ budgets don’t allow for large equipment purchases upfront, but they will work with independent leasing companies to make monthly payments over a period of time. Also, some companies prefer to have an operating lease treatment, which means they can finance the transaction off a balance sheet: They don’t have to include the asset or liability on their balance sheet; they just include the monthly rent payment that they have on a lease.

What are the advantages of leases over loans?

Leases are most advantageous to companies that are acquiring equipment that is subject to technological obsolescence, such as IT equipment or medical equipment. A lease provides the lessee with the flexibility of little to no down payment, lower monthly costs, and the ability to return or release the equipment at the end of the initial lease. Leases also allow the lessee the possibility of upgrading the equipment prior to the end of the lease term.

What is a warehouse line of credit?

Leasing companies typically fund leases and then get their funding for the transaction from a bank. A warehouse line of credit allows a leasing company to fund a transaction on their own before obtaining their permanent funding from a bank. A good analogy, although perhaps not so good in today’s environment, is a mortgage broker. First, a mortgage broker funds a mortgage. The mortgage broker then gets money from a bank through a warehouse line of credit. Finally, the mortgage broker sells off the mortgage to an investor and gets paid back. Leasing companies work the same way: They bundle leases themselves by using a warehouse line of credit, and then they assign it to another lending source.

How can a leasing company benefit from a warehouse line of credit?

Leasing companies are typically not capitalized well enough to fund large transactions. As a result, they need a bank to, at a minimum, fund the underlying transaction. Traditional financing options, however, don’t help a leasing company that a) wants to fund a transaction without requiring a bank approval; b) needs to fund progress payments on a deal before it goes to term; or c) wants to shop the market for an attractive rate. A warehouse line of credit provides a leasing company with flexibility by having the lender fund the lease or progress payments for a short period of time — typically 90 days — before the deal is sold to a permanent lender.

What are the advantages of an equity line of credit?

A leasing company typically invests equity into a deal, commonly called the residual. This is money that is permanently left in a transaction until the end of a lease term when the equipment is either sold to the lessee, the lease is extended or it is sold to a third party. An equity line is typically for a smaller amount than a warehouse line of credit and requires a fairly strong lessor. It is also for a higher rate of interest than the warehouse line because the line is funding equity and not debt. The equity line of credit is full recourse to the lessor.

An equity line of credit provides lessors with more opportunities to do business as they can leverage their equity. Since banks are providing the equity loan for them, leasing companies can pursue more deals by borrowing the equity in some of their transactions. With greater access to capital, they are able to do more business while still retaining the benefits of owning the equity.

BRIAN GRIFFIN is senior vice president, leasing, for MB Financial Bank in Chicago. Reach him at bgriffin@mbfinancial.com or (847) 653-1874.