Feb 1, 2000 12:00 PM, Gary Eskow
Helping the end user finance the installed system will not only yieldhigher quality, but it will also increase customer loyalty.
The stock market looks like an arrow climbing to the sky, but that does notmean that financing equipment is a piece of cake for the sound contractorservices in today's economy. Having an MBA is not required to run aprofitable contracting business, but understanding the finance options thatare available when you bid just might help you land jobs that might havegone to your competitors, especially if you have a good understanding ofthe different ways that equipment may be capitalized.
Paralleling and perhaps reflecting the encroaching presence of surroundsound systems in movie theaters and the home, surround sound now plays acritical part in the arena and church environments as well. The desire forequipment that can reproduce audio tracks with full frequency responseacross a wide field can, however, exceed a client's ready cash. When yourclient shrugs and says the money for the console or outboard gear yourecommend simply is not there, how do you respond?
Explaining the existence of creative leasing options that can minimizeup-front cash outlays might help you sell the project the way you believeit should be handled, bill for all the work the proper installationrequires and give your client the system that is best for the applicationat a monthly price that is affordable.
Once your client expresses an interest in investigating leasing options,you might consider referring him or her to a company that deals in thisarea. Balboa Capital is an equipment leasing and finance companyspecializing in high-technology industries. I asked John Albin, Balboa'sdirector of marketing, if a leasing company needs to have specificknowledge about a niche industry like sound contracting in order to providethe best possible information to the client.
In response, he said, "In the industries that we concentrate in, we addvalue when we understand the equipment. We understand its uses, how revenueis generated and the profile of companies that want to lease. We're big inthe audio industry, but more in the production side. We have a strongconcentration in the audio engineering side and have helped out in theselling of mixing consoles, for example. The fact that we understand audiogear does give us an advantage."
Tom Roche of U.S. Commerce Equipment Finance, L.L.C, said, "Absolutely,yes. A good example would be a company that might try to get approved on alease for a $50,000 console, a stack of loudspeakers or amplifiers. If theleasing company in question is familiar with the equipment and its value,this might enhance its credit decision if it is trying to shore up thecredit risk. A leasing company that is unfamiliar with the equipment willmost likely look at the transaction as unsecured credit and might notextend the customer the credit they deserve."
That makes sense. If a leasing company is looking at only the bottom linenumbers, it may turn down a client with borderline financials. A leasingcompany that understands where a given industry is headed and analyzes thepurchases accordingly might reach a different conclusion. Are therespecific formulas that leasing companies use, ones that the soundcontractor should know about?
Albin said, "Yes and no. If a sound contractor works on a regular basiswith a leasing company, that company could provide the rates used tocalculate proposals. We find that some vendors simply don't want to takeapplications. If one of their customers wants a lease, they tell them tocontact Balboa Capital. We'll take the customer through the options and paythe sound contractor at the end of the deal. Small sound contractors mightnot have time or resources to get involved with their clients' financing,larger ones might. We'll help out either way."
Most companies want a three to four multiple return on their investment,according to Roche. "If a company spends $100,000 on a system, and themonthly lease payment is $2,100, they are going to want at least $6,000 to$8,000 per month as a return on their investment."
The audio industry has changed dramatically in the last decade or two. Havethe advancements in technology changed the way equipment is financed in anyway? Our research indicates that lease purchasing has risen during thattime.
"About 10 to 20 years ago, utilizing leasing to expand your business wasrare; now it's common place," said Roche.
There are some general guidelines to follow when considering a leasingarrangement, principles that remain constant even as the winds oftechnology blow different equipment in and out of the marketplace. Knowingthe difference between a fair market value lease and a dollar buyout leaseis essential. A fair market lease - be it for 24, 36 or 48 months - letsthe user walk away from the gear at the end of the lease period or purchaseit at blue book (fair market) value. The fact that your client has beenpaying for the equipment all along means nothing in this scenario; the onlyconsideration is the resale value it has at the close of the lease.
You should recommend a fair market lease to a client who seems to be in agrowth mode. The console this company installs today may be too small forits needs several years down the road. Making lower monthly payments andwalking away at the end of the deal is probably the right bet for thisclient to make.
Perhaps your client has more modest plans for its audio design. A church,for example, might be looking to hold on to a monitoring system for 10years or more. In this case, a dollar buyout lease might be more advisable.With a dollar buyout lease, the monthly payment is higher because theclient will be buying ownership in the gear as well as paying a price eachmonth to use it for a prescribed period of time. At the end of a dollarbuyout lease, there is no residual value left in the equipment; it belongsto the client.
Of course, your client could fall somewhere in the middle, believing thatthe console you installed today could suit his needs indefinitely butfeeling uncomfortable with the higher monthly payments that come with adollar buy out lease. What advice would you give in this circumstance? Yourbest counsel here would be to paraphrase Clint Eastwood and ask your clientif he or she feels lucky today because it is time to gamble on wheretechnology is going and how it will affect the value of the gear beingpurchased. Consider the fair market value lease for 36 months on a piece ofequipment you might like to have for 10 years and watch its value dip orsoar as your term ends. If the value has dropped significantly, the clientwins. If, however, it held its value, your client may have to pony up 30%to 50% of its original purchase cost. Another option is to play it moreconservatively, suck it up, and pay the higher monthly premiums that gowith a dollar value lease. Whichever way your client goes, the chances arethat he will be impressed with the fact that you have gone the extra mileto see things from his financial perspective and are not limited to justthe audio requirements of the job. On the flip side, if your client'sbusiness requires that all gear must be au courant, taking a 60 month leaseon gear that is obsolete in two years can be a killer.
Roche said that too many clients make another basic mistake. "Not gettingtheir financing in place before negotiating the equipment purchase. You'realways in a better bargaining position with cash in hand or pre-approved byyour lender."
Roche also said that shopping your deal to multiple leasing companies canbe a mistake. "Every company will put an inquiry on your credit bureaureport, and the credit bureau agencies will deduct points for each inquiry,thus lowering your overall credit score. You're much better off with oneleasing company with a reputation of being fair and competitive with a goodhistory in your industry."
Albin said that selecting a leasing company that is right for your clientis critical. "A company may not have any ability working with start ups,though their rates may be good. If they don't know the gear, say that workswith trucks, a leasing company might be afraid of the equipment and putspecial restrictions on the lease."
Albin also pointed out that leasing arrangements for religious institutionsdiffer from commercial applications. "The credit evaluation is completelydifferent. Church donation funds have to be verified regarding this type ofexpense. These kinds of applications are reviewed by a leasing companydifferently than if a stadium, for example, were purchasing gear. Not thatthe examination process is more strenuous for one than the other, justdifferent. When we're dealing with a sole proprietorship, for example,we'll look at the personal credit of the buyer. With a church, we'll lookat the financial history of the institution. Another interesting aspect ofchurch funding lies in the fact that although all capital decisions mayhave to go before a board, leasing, which is essentially rent, is an areathat a general manager is often empowered to make decisions on."
This is the new age, so you probably expected to find that online leasingis now available. Well, you are right, and filing an application online cancut down the time you spend in the process.
Roche said to be careful that you are dealing directly with the lender, andnot a broker. "A true lender should give you an approval in a matter ofminutes, whereas a broker might say they will contact you the followingbusiness day with additional information requested before they are able toget you approved by a lender."
I have pointed out some of the ways that leasing can help the soundcontractor's client and how a knowledge of financing can help thecontractor add value to the services he or she provides, but as Rochepointed out, you should not overlook the banking industry.
"Bank lines of credit should be used for working capital, revolving creditlines, inventory financing, lease hold improvements and so on," Roche said."Leasing companies are used strictly for acquiring equipment. Theytypically do not provide the financial services offered at a bank."