Leasing 101: Understanding Merchant Quality

By Corey Saftler, President, Integrated Leasing Corp.

In previous articles I explained how to increase your sales commissions and enhance your merchants' profitability utilizing an equipment lease versus equipment cash sales. In this installment I will show how merchant quality pertains to sales commissions and profitability.

Most leasing companies in our business require that each of their merchants sign a personal guarantee for the equipment as an inducement to lease. Remember, as I have previously mentioned, the lease is the equivalent of a loan, whereby, in exchange for equipment, the merchant promises to pay the leasing company small, incremental payments over a specified time period.

In return, the salesman is paid upfront by the leasing company. Therefore, the person signing the lease, called the personal guarantor, is signing the lease as an inducement for the leasing company to make the "loan."

Question: How does a leasing company know who will pay their lease and who won't, and how does it affect my commissions?

I am often asked, "How do I know who will pay me and who won't?" The answer is very simple: I don't. If I did, I wouldn't be here, working. I'd be on the golf course or deep-sea fishing.

Leasing companies have learned to establish "risk parameters" that help them arrive at approximate delinquency performance for the merchant base that you, the salesman, sign up. Generally, these parameters or guidelines alert the leasing company to the ability of a merchant to pay back the debt.

The leasing company examines, among other criteria: the personal guarantor's assets, the total credit exposure of the personal guarantor, the duration of his or her credit and the timeliness of previous payments. These factors, along with a complete description of the merchant's business and length of ownership, allow the leasing company to make a reasonable "offer" to the salesman regarding what it will pay for the lease. This "offer" is made in the form of the factor rate, which I described in a previous article.

After examination of the individual's credit and business, the leasing company comes up with a risk "score." This score (preferred, A, B, C, D and X, as an example) equates to a factor rate. This factor rate, generally, dictates the overall performance of the group that this merchant/guarantor belongs to.

For example, a restaurant owner, in business for four years, with the owner/guarantor having a home with a mortgage that he or she has been paying on a timely basis, probably would receive a preferred or "A" rate from the leasing company.

The preferred or "A" rate alerts us to the fact that our chances of being paid back throughout the term of the lease are very good. Therefore, we are willing to pay the salesman our top rate, earning him or her the highest commission. Our experience tells us that the delinquency level for this type of merchant is very low.

Conversely, if the merchant/applicant were brand new in business and his or her previous payment history showed serious blemishes, such as extremely late payments or open delinquent accounts, this merchant probably would get a "D" or "X" rate.

The "D" or "X" rate points to the probability that this owner/guarantor most likely will not make his payments throughout the term of the lease. Again, the leasing company has an established delinquency level for this group of merchants and makes a much lower "offer" to the salesman that translates to a higher factor rate.

Here are samples of the difference between the two funding rates listed above:

• "A" rate factor of .02875 where merchant's payments are $39 per month for 48 months = $1,356.52

• "D" rate factor of .04290 where merchant's payments are $39 per month for 48 months = $909.09

Using the examples above, it is easy to see that the difference in commissions equates to the difference in probable delinquency levels. The higher commissions, obviously, are the incentive leasing companies use to acquire better merchants. Therefore, the salesman has a vested interest in sending us the best quality merchant/guarantor.

Corey Saftler is the President of Integrated Leasing Corp. Founded in 1995, Integrated has become one of the premier point-of-sale leasing companies.