Leasing 101: Learning the Basics, Learning the Math

B y Corey Saftler President, Integrated Leasing Corp.

In previous articles, I described how your merchant can benefit from a lease versus an outright purchase and, more important, how YOU EARN HIGHER COMMISSIONS by converting a cash purchase to a lease. The concept of lowering up-front costs by spreading out low monthly payments appeals to merchants' cash-flow concerns and makes it easier to sell state-of-the-art technology.

Now it's time to focus on the math involved. I have found that most salespeople don't have a true understanding of how their commission is derived.

Years ago, when I started working in this industry, my first question was: What is a factor rate? Put simply, the factor rate is a monetary conversion table. This table allows you to calculate monthly payments spread over the term of a given lease, for a specific dollar amount.

The conversion affords you the ability to calculate your base costs, sales expenses and marketing fees to create a value for your product or service. Then, using your factor rate, you can convert these costs into your merchant's monthly fee and thereby project your commission.

Confused? Don't be. It sounds much harder than it is. For the sake of this article, let's assume the term of the lease is 48 months and the factor rate is .0300:

1. If the ISO wishes to receive $1,200, then to arrive at the merchant's monthly payment, simply multiply $1,200 times the .0300 factor rate to arrive at $36 - the $36 being the merchant's base monthly payment.

2. Conversely, if the merchant can afford to pay only $30 per month and the ISO needs to calculate the gross commission he or she would receive for the lease, simply divide $30 by the .0300 factor rate to arrive at $1,000. In this example, the ISO receives $200 less.

As I mentioned in previous articles, most leasing companies in our industry accept a "range" of prices for the different types of equipment. This enables you to predetermine your commission based upon what your market can bear.

So, with an understanding of the factor rates in advance of your contact with your potential client, if the same merchant were to agree to a payment of $39 per month, the commission would be $1,300 or an INCREASED COMMISSION OF $100.

Obviously, the pricing level a leasing company tolerates as to what is an acceptable funding range must be within reason. Most leasing companies in our industry hold to a maximum funding formula. This formula is usually a multiple of the equipment costs, which include the ISO's marketing, sales and installation fees.

The leasing company usually establishes a price guideline that the ISO must follow. Based upon varying factors, such as geographic region, economic environment and stiffness of competition, the ISO can maximize his or her profit.

Next: Merchant quality.