“Using Equipment Leasing Recourse To Increase Sales”
If you’re an equipment dealer or equipment reseller, your number one goal is to sell more equipment, right?The biggest barrier to equipment sales, especially with bigger ticket items, is your customer’s inability to get the equipment financing or equipment leasing from a third party financing source to close the deal.
If you resell used equipment only or used as well as new, then offering the lender some form of recourse can be beneficial to you in a number of ways,
First, of all, what is a recourse agreement?
In simple terms, if the buyer defaults on the financing arranged to acquire a particular piece of equipment, the dealer agrees to buy the asset back at a predetermined price or a price that will be determined by a predetermined formula for setting it.
The proceeds from the sale go towards paying down the lender or leasing company debt and the asset is added to the dealer inventory for sale.
How Can Equipment Leasing Recourse Benefit Your Business Profits?
There are two main ways that a recourse agreement can benefit you as a dealer.
The first and most obvious way is that more customers are going to be able to qualify for financing which is going to result in more sales and more profits.
The second benefit of recourse agreements are that they can provide a low cost source of used equipment inventory that can be resold for additional profits.
Let’s look at an example.
An equipment dealer enters into a recourse agreement with the financing company whereby in the event of default the dealer agrees to purchase the equipment back from the leasing company for 50% of its initial cost during the term of the lease.
Say the lease term is 3 years and the dealer is very confident that the equipment will be worth more than 50% of the purchase price at the end of the lease term.
Because of the borrower or lessee’s difficulty securing credit without recourse, the lender or leasing company asks for a 25% down payment.
The recourse agreement reduces the lessor’s risk of loss to 25% and if the lessor makes their payments for at least one year, then no loss can be incurred.
In the event of default, the dealer acquires the asset back at potentially a below market price and puts it into inventory to resell.
The dealers risk is in the actual market value of the asset in the event of default which places the profit margin from the original sale at risk.
But considering that default is likely only going to happen occasionally, the dealer has made more sales through recourse and banked the related profit margin from the additional sales.
Again, this is a very oversimplified example as there can be almost an infinite variety to potential recourse agreements.
But the point remains that if done right, an equipment leasing recourse agreement can increase both sales and profits
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