More On Collateral

Collateral can be a big factor in the approval process for an equipment lease.

Does collateral affect pricing? Absolutely

If collateral is strong (heavy asset or something with a large active secondary market), then a residual value can be more easily established and profit through the resale of the equipment more easily attained by the lessor. Those things mean better pricing, higher residual value and lower stream rate (interest rate payable on the monthly payment stream).

Why does a higher residual mean a lower stream rate?

Think of it this way, let's say the lessor's required return is 12%. With no residual, the 12% most come from the payment stream. With a good residual value, some of that 12% can come from the payment stream and some from the resale of the equipment (either to the lessee or in the secondary market if the equipment is returned. Here is an illustration with a $10,000 lease over 36 months:


Equip Value 10000 10000
Term 36 36
Residual 1000 1
Payment 329 329
Rate 6.26% 12.03%


Note the difference with the same monthly payment. The lessor only gets 6% of their return from the 36 month payment stream. The client (and lessee) also benefits because if the equipment is returned, then the $1000 residual value is saved since they aren't paying for that as well. A true win/win.

Stu
Southern Lending Solutions