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Street SmartsSM:
What's in a Lease?

By Amy B. Garvey

Editor's Note: The National Association of Payment Professionals' (NAOPP) Board of Directors now serves as the host of "Street Smarts." Individual members of NAOPP's Board rotate authorship of the column.

It's another day in the trenches. I thought leasing would be a good topic to cover because it seems like no matter how perfectly we fill out our paperwork, how diligently we cross our "t's" and dot our "i's," issues always come up with leases. NAOPP posted the following question on GS Online's MLS Forum:

"If you could speak frankly with a lease company about the difficulties you have getting leases through, and what could speed the process for you, what would you like to see addressed?"

Although Forum members posted very interesting responses to this question, very few were concerned with lease processing. Instead, most addressed the perception of lease companies' unfair practices.

One Forum member, "Jenglish," summed up a majority of the sentiment with the statement "I would also like to see a $1 buyout; it just seems very unfair to the merchant to pay 10%."

With this in mind, I interviewed Corey Saftler, President of Integrated Leasing Corp.

While the 10% buyout Jenglish referred to might seem unfair, Saftler said that it is an essential part of the profit formula for lease companies. In leasing, profit is called yield, and the companies include the buyout amount in calculating yields.

Lease companies take out tremendous loans to cover the contracts we sell every day. They have to pay money for those loans like anyone else.

While many merchants might try to correlate their lease payments to an interest rate, that term really doesn't apply to merchants because a lease company needs a profit margin just like every other business.

To further explain this concept, I asked Saftler to provide more information on the present value of money.

"In order to calculate a profit on a lease, it is unfair to accept money at today's value and apply it to tomorrow's return," Saftler said.

"This is called present value, and a simple example is: If a lease company funds you $1,000 cash for a lease today and is promised a pay back of $1,440 ($30/month for 48 months), you cannot assume the profit is $440. The true cost of the $1,000 you're funded is that amount plus the cost to the lease company to borrow the money.

"Assuming the lease company's cost of borrowing is 10%, their present value on the $1,000 is $1,000 plus $400 (10% of $1,000 = $100, multiplied by four years), or $1,400, leaving the lease company with a profit of only $40.

"Obviously, no company can stay in business earning $40 per deal. In order to achieve a reasonable profit per lease, the return must include nothing less than a 10% fair market value (or in this example, a $140 buyout)."

To restate: In this example, the cash cost to the lease company is $1,000, the money it funds to the agent. The present value cost to the lease company is $400, for a total cost to the lease company of $1,400.

The merchant pays back $30 per month for four years, or $1,440, plus $144 in the 10% buyout, giving the lease company a total of $1,584 earned on that lease in the four years.

Deduct its cost of holding that paper during the term, and it leaves a total of $184 in what we would consider profit, or a measly 12%.

Most industries operate on an average of 25% - 50% profit margins, and though it is typically higher than 12% for lease companies (we've over simplified for this example), by no means do they gouge merchants.

Although merchants choose to lease for a variety of reasons, one important one is that they can use the extra $1,000 or so that they would have spent on equipment to purchase and sell goods in their stores.

Furthermore, merchants can take a deduction on their taxes for the full amount of the lease payment each month. This is called an off-balance sheet asset; it does not go on their balance sheet at tax time, and they can deduct it as a straight cost of doing business (like a utility payment).

"... The $1 buyout is out of the lease company's control and has more to do with the IRS. I believe the $1 buyout classifies the 'lease' as a 'loan' and therefore the merchant can't write off 100% of the payment (only the interest)," wrote "toby," an MLS Forum member.

Saftler verified toby's comment as accurate. He also touched on loss and destruction waivers (LDWs), another area of concern for many merchant level salespeople (MLSs) and merchants.

Essentially, the additional money tacked onto a lease payment for insurance or tax covers the lease company's investment in the lease should anything happen to the equipment.

The equipment is the lease company's only form of collateral other than the contract, and the company is obligated to cover the equipment to protect its investment. Some lease companies will actually replace merchants' equipment if something happens to it, and the waiver covers it, but merchants have to prove with at least a police report that they didn't do something to the equipment.

Regardless of a waiver, merchants are still obligated under the terms of the lease. As MLSs, we share in the responsibility of communicating to merchants their obligations under a lease.

When describing this obligation to merchants, I use the analogy of purchasing an automobile. By law, you're required to carry comprehensive and collision insurance on a car with a lien. In other words, if you receive a loan to purchase a new car, you must have insurance to protect the company that provided the loan.

The insurance company and car dealership could care less whether you drive the car or leave it sitting in your driveway. You still have to insure it.

Unless you have a warranty on the car (most POS terminals on the market come with a warranty), you'll have to pay for any car repairs, even while paying the loan and the insurance. Asking a lease company to repair or replace a terminal when a merchant runs into issues would be like asking your car dealership to make repairs to your car for free.

Try using "But I have comprehensive insurance on this car" as an explanation for why you shouldn't have to pay for repairs. Or better yet, contact your insurance company and tell them you want them to pay for the repairs.

Leasing terminals is a very similar situation. The lease company has to have insurance on its collateral, but neither the lease company nor the insurance carrier is responsible for maintaining the equipment. That responsibility falls to merchants, which is the definition of a lease contract.

If merchants spill a bottle of soda on the new terminal, they'll be frustrated, but you can cushion the blow by telling them upfront that the equipment is not covered against negligence or abuse.

How do you say this without offending them? I tell merchants that we will replace equipment for them at exactly what it costs us when the problem is something we can fix. But if you dump a bottle of water on it, you're out of luck.

If you buy a new DVD player at a national retailer, it will most likely have a warranty. However, if you accidentally run over it in your driveway because you left it on top of the car, the manufacturer and the retailer (not to mention your credit card company) will tell you, in essence, that you'll simply have to buy another one.

No one will reimburse you because it's no one's fault but your own.

MLS Forum member "rbelcher" wrote "With the price of equipment now, lease it yourself. Get what you have into the equipment as a down payment, and then the payments are pure profit. You do not get all the money upfront, but you surely make more."

Again, this is a cost of doing business issue. If you only write a few equipment deals a year, this might work wonderfully. But if you write even just four a month, at the end of three years, you're collecting on 144 different leases, and I personally don't want the headaches.

We all know merchants go out of business, file bankruptcy, change bank accounts and refuse to pay, etc. Consider these questions before doing your own leasing:

  • How will you handle collections when you have hundreds of clients on the books?
  • Will you spend all your time going after the money and not signing new deals?

The lease companies offer a service, and we are certainly under no obligation to use it. If we think they're being unfair or gouging merchants, we have every right in the world to accept cash only or to become our own leasing groups. But accepting cash only will surely limit the number of deals we can sign, and I want to be a sales rep, not a lease company.

The final issue raised by the responses on the MLS Forum is one of communication. MLS Forum member "toby" wrote, "I'd like to see more lease companies with faxed ONLY contracts. Real time online reporting of grades, funding and delinquencies would also help me greatly."

PaynetSystems commented on chargebacks and merchant accusations of forged signatures.

Saftler is aware of the issues many agents have when it comes to communicating with their lessors, and while he can only speak on behalf of Integrated Leasing, he said that most providers are working to improve communication with their reps across the board.

Part of the problem is that if the relationship with your lease company is, in reality, a relationship between your ISO and the lease company, the ISO might not always want you to have the information. The easiest way to avoid many of the pitfalls described is to take personal responsibility for communication issues.

My advice is to always get a photocopy of the merchant's driver's license. It might not be easy, but it will always cover you in questions of forgery.

Before you agree to work with a lease company, find out where it stands on faxed or hardcopy leases. Find out how it derives its credit scores; the scores must be consistent (a lease company might tell you it's a "C" when it's really an "A").

Ask for reports on every lease you write. Check the integrity of the lease company for which you are considering writing. Join organizations and participate in industry dialogue.

You'll learn very quickly which lease companies offer fast response times, consistent scoring, quick funding and quality help with problems.

There will always be problems. But that's what most of us love about this industry, the "never a dull moment" appeal. Until next time ...

Amy B. Garvey is Secretary of NAOPP. She works in the Upstate of South Carolina as a sales agent for New York-based BPS. Call her at 864-901-8722 or e-mail her at

Corey Saftler is President of Integrated Leasing Corp. Founded in 1995, the company is dedicated exclusively to the POS payments industry.

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