What equipment leasing has to offer as a diversification strategy
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It is now more important than ever for the industry to look into opportunities to bring in additional income streams. AB's Agnes Gajewska investigates what equipment leasing has to offer as a diversification strategy, and how brokers can capitalise
With many brokers no doubt noticing the burning holes being left in their pockets due to current market conditions, most do not need reminding that cross-selling opportunities are advantageous to their cause. But finding the right approach and segment of the market can prove confusing.
One option from the plethora of those available - and one which a lot of brokers are starting to tap into - is leasing finance. According to those offering the products, it is a quick, efficient and lucrative way for mortgage brokers to equip themselves with income, client retention and referrals.
Lease finance 101
Lease finance is a long-standing financial product which has risen to prominence over the past 50 years. It comprises roughly 40% of the nation's equipment expenditure, according to the Australian Equipment Lessors Association, and there are a wide range of finance product offerings.
Leases cover most capital commercial equipment items (anything from computers to helicopters) and are written for various periods of time, though generally they range between two and five years. The rates which apply to the products are usually fixed for the period of the lease and at the completion of the lease a client has the option of upgrading or buying out the item in question.
Lease providers vary in the types of equipment they are able to offer, the amounts they are able to finance, and the way in which they interact with and remunerate brokers.
However, in general, equipment leases are broken down into four basic product types: finance leases, operating leases, hire purchases and chattel mortgages.
Where do brokers fit in?
According to LeaseChoice managing director Kirk Tsihlis, the effects of the credit crunch have had an impact not only on interest rates and LVRs, but also on the attitude of borrowers.
"The days of the 'don't worry, I'll put that on my mortgage' approach are definitely over," he says. "Coupled with the increases in the variable rate for most banks and loan providers, leasing has become a more commercially astute and attractive option because it isn't driven by property dynamics."
As such, it is likely that many of a mortgage broker's existing clients - any who operate a business - would at some point require an equipment lease.
"As a first step, brokers should definitely look to their database and consider which of their clients may require a complete financial solution," says Sam Lynch, general manager of IAC Equipment.
Finlease managing director Mark O'Donoghue adds that brokers' clients are often SMEs, for whom they have provided property finance. "They have a great relationship and they're looking to provide more services to that client," he says.
"A typical client may have $100,000 a year or more in non-property needs. That can be something as simple as motor cars, but could also include office equipment, machinery, trucks or earth moving gear. The amount of services that this mortgage broker can provide to the client is going to be dictated by what the client does."
Off on the right foot
Equipment leasing can offer a myriad of opportunities for brokers willing to dip their toes in, however - as with any unfamiliar territory - pitfalls also lie in their wake.
Since reputation and providing the best possible outcome are key to retaining clients, it is imperative that brokers start off on the right foot.
According to the experts, this should be a simple (and logical) process of identifying the clients who may require the products, contacting the right provider, educating themselves about the available options and being proactive.
"Get trained, get accredited and get active," says Tsihlis.
"Pick one of the customers you know well who needs equipment, be open and honest with them - tell them that you're learning this process as well... Once you're up to speed it becomes that much easier," Lynch adds.
Knowledge is power
Although mortgage brokers are used to dealing with various lenders and products, the equipment leasing space is quite different in how it operates.
"The products share a set of common characteristics and benefits. Importantly, however, there are fundamental differences between the products, which are necessary to take into account when determining the best option for your clients," says Tsihlis.
"The key skills of listening and understanding customers needs to remain the same; however, a broker needs to appreciate differences in servicing and capacity to repay models."
"It's a very different discipline to property finance; there are all sorts of variations to a scenario, there's a lot of knowledge that needs to be used to ensure that the client gets the same level of quality when provided with property finance," adds O'Donoghue. "There's always a way up the mountain, but it's a matter of knowing which path to take."
For this reason, becoming familiar and confident with the products is essential. The approach and company you initiate first contact with, however, can vary.
Certain companies such as Finlease involve brokers as introducers in a referral model and handle the client liaising process.
"Finlease pays brokers a referral fee upfront and then works for their clients on their behalf. However, we're happy for brokers to be involved as much as they'd like to be. That way they can see the process, be mentored and learn along the way, but they're doing it in a safe portal," says O'Donoghue.
Providers of equipment financing such as IAC Equipment, however, require more involvement from brokers.
"We trust the broker to deal directly with the client. It's the broker's customer, we rely on the broker to personally speak to that customer, to receive an application, sign the contract documents and go through the whole process," says Lynch.
However, he further emphasises that brokers are encouraged to speak with the provider regarding particular scenarios or clients, in order to be fully aware of the process. IAC also runs a six-week provisional accreditation period during which brokers are assisted through the practical application process.
LeaseChoice, on the other hand, offers a monthly workshop for accredited introducers to help refine or develop all of the skills necessary to maximise on leasing opportunities.
The good, the bad and the ugly
As with most things in life, equipment leasing has its perks and its pitfalls.
The good
Brokers who look to this space can take advantage of several significant benefits. Firstly, there is the issue of income. Although broker commissions are dependent on the size and term of the lease as well as on the provider who finances it, they can expect considerable remuneration. The commissions on the products can be as high as 10% of the total sum of the loan, or they can work on an upfront fee based on the amount of finance required.
Timing is also a key benefit. While most brokers are accustomed to waiting several weeks to receive mortgage commissions, most non-property leases are settled within a 24-hour period, with commissions paid within the same week and often on the same day.
Aside from income benefits, the extra service to clients can also work towards building a broker's reputation and brand.
"If you're delivering the additional service to your client, you're looking after your client's financial needs," says Lynch. "If a broker can't satisfy the client's needs, that client will go somewhere else and, as a result, that broker may lose the next mortgage or refinance as well."
Further, since leases run on short-term periods, brokers have the opportunity to contact their clients more frequently, which can open up dialogue about other mortgage or investment property related topics.
"It's a great communication mechanism with clients, and it keeps the broker at the forefront of their clients' minds," explains O'Donoghue.
Lastly, a client who receives quality service is likely to refer more of their contacts - both business and personal - to the broker, thereby assisting in lead generation and business volume.
The bad
Equipment leasing products are complex. Although many clients may require 'vanilla deals' such as basic car leases, there are also more complex cases which rely on a multitude of different factors.
"It's like the iceberg - what you see above the water is only 15% of the real circumstance," says O'Donoghue. "So it's incredibly important that when a transaction is submitted, it's submitted in the appropriate way."
As with most finance deals, if they are not submitted correctly brokers run the chance of good quality finance being rejected. This could lead to the clients feeling disenchanted with the broker and heading to a different professional for future financial advice.
Most of this comes down to understanding the available products, the criteria which applies to each and the specific needs and requirements of clients.
O'Donoghue suggests that novice brokers begin by enlisting the services of a provider who has trained and educated staff who can handle the transaction.
Lynch advises that brokers ask lots of questions and maintain a strong level of communication with their provider while filling out client application forms.
The ugly
A technical issue which comes into play with equipment leasing is the proper structuring of tax implications and, without proper understanding, this can get ugly.
"Dependent on the product's selection, clients can claim 100% tax benefit for each payment, claim all of the GST upfront, or claim only the depreciation and interest," explains Tsihlis.
"The ATO and accounting standards AAS17 simply define leases as operating leases and or financial leases for the purposes of tax treatment. Though they provide several tests in defining either, the key test revolves around who'll own the asset at the end of the lease [the leasing company or the client/lessee]."
Therefore, if the tax considerations are not structured properly, the end of the financial year can be troublesome for the client and, as a result, for the broker.
"For example, if a client is reporting their business activity statement (BAS) on a cash basis and the mortgage broker unwittingly puts the client into a commercial higher purchase agreement as opposed to a chattel mortgage, then the client may have the expectation that they'll get the GST refund in the next BAS, only to find that they're not allowed to do that," O'Donoghue explains.
By taking one slightly wrong move in the structure, the broker can upset the client. But this can be avoided by learning and distinguishing between the tax benefits and how they relate to the products. According to Tsihlis, the first important question to ask clients during the process of product selection is: 'To own or not to own?'
"Generally, a broker should ask their client whether they would prefer to own the asset in five years' time or whether they would prefer the possible accelerated tax and cash-flow benefits. The corollary of this question is whether the market value of the asset in five years will be more than the total dollar benefit of an accelerated tax treatment," he explains.
A steep curve
Of course, this all means that just as an introduction to mortgage broking involves a steep learning curve, so too does a broker's introduction into the world of leasing. However, with the right advice, attitude and commitment, brokers can supplement their depleting revenue streams - they merely need to get equipped!
Checklist
According to LeaseChoice managing director Kirk Tsihlis, when selecting the right provider or leasing partner, a broker needs to assure they satisfy five criteria:
(1) Provide the total suite of lease products
(2) Cater for the majority of equipment types
(3) Cater for the majority of credit types
(4) Price clients based on profile
(5) Offer quick serviced turnarounds
Lease products explained
Operating lease
Transaction not recorded on balance sheet. Risk of ownership rests with lessor; lessee holds no responsibility over ownership. Depreciation benefits accrue to lessor.
Finance lease
Agreement covers most of 'useful life' of asset based on lessee guaranteeing residual value of asset at end of lease term. Lessee bears responsibility of ownership. Value of goods shown on balance sheet less depreciation. Future rentals shown as liabilities.
Chattel mortgage
A mortgage over equipment. Requires registration and incurs registration fees. Has certain upfront GST benefits.
Hire purchase
Ownership of goods rests with lender, but borrower can purchase assets by making all payments - including 'balloon payment' at end of term. Asset appears on lessee's balance sheet less depreciation.
Source: LeaseChoice
