ss_blog_claim=bd50edc517cf0b7549fe6b5f63b6b5f8 The SLS Business Finance Blog: Collateral Based Leases

Monday, February 23, 2009

Collateral Based Leases

Collateral can be an important factor in both the approval and the pricing of a lease. How so?

There are many companies in the equipment leasing business that make their $$ off the residual values. Many leases, and all true leases, are structured with a residual value and purchase option. Often that purchase option is $1, 10% or Fair Market Value (FMV). So leasing companies can make $$ on the residual if they do a 10% option and their real cost is 5 or 6%. That spread becomes their profit. Since lease rates have to be affordable and competitive, as well as profitable, this means lessors have to be familiar with the equipment type and know how much they can resell the equipment for should the client (the lessee) return the equipment. If the residual value is way too high, then the payments are way too low (at the same lease rate) and the lease isn't profitable so its a balancing act.

There are other factors that influence collateral's affect on pricing as well for future entries.

Southern Lending Solutions

No comments: