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Choosing a Lessor

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Leasing Practice

Step 4 – Choosing a Lessor

This too is a step, which the future lessee must undertake, although it is oftern neglected and left to chance.

The mantra that “he who gives me money, must be a good person!” is not always true. Here are a few consideration why:

  1. Additional possibilities

The fact is that there are many different promotions offered by leasing companies – free insurance, discounts on the price, reduced interest, purchase of old equipment, free additional equipment and much more. Many of these promotions are a pure marketing tool and seldom benefit the lessee. At the same time, some of them are completely real and actually add value to the lease deal. The Lessor usually uses the power of his financial group or that of his or her partners to offer a leasing service that really differs from others.

The BMW group, for example, have specific requirements on the applicable interest rates and leases on their cars, which they successfully impose on their leasing partner companies. “This imposition” is not necessarily at the expense of the Lessor. If necessary, BMW subsidizes deviations from the desired interest and fees in markets where interest rates are higher than required.

Captive leasing companies have amazing capabilities to balance leasing rates and profits from car sales (we say “car” because most Captive companies are precisely “Captive” to automakers or car dealers). They often consider leasing only as a way to increase their sales. That is why many of the Captive leasing companies’ offers are at priced at the rates of bank credits for large clients /i.e. have low interest rates/. Do not be surprised. The objective of the Captive is only to increase the number of cars sold and accordingly sells its service at prices equal to or close to the cost of the financial resources they use. Their profit comes from the sale of cars. Various additional combinations associated with extra car equipment, high residual value, free technical support can often be noted – the captives have these options at their hand.

Other lessors are part of large financial groups, with sister insurance companies. You have already figured out where the “free insurance” comes from. Sometimes insurance promotions may also have been achieved by partner insurance companies.

The conclusion is that it is quite reasonable that when we have already decided to purchase an asset by leasing, we should study the market for such a leasing company that can offer the best conditions and accompanying promotions, as we see fit for our needs.

  1. Lessor focus

It is true that there are many lessors in Bulgaria. A check in the BNB register for 2017 shows that there are over 100 leasing companies in our country. Not everyone, however, is suitable for every lessee. Each Lessor has a certain focus of his business. Some specialize in leasing new cars, others specialize in leasing used cars, third yet have chosen an even narrower focus – leasing of used cars to individuals only. Of course, there are lessors who prefer corporate clients. For some, leased machinery and equipment is a daily routine, for others, this would be challenging. Some are looking for large multi-million deals, others are specializing in many lower-priced deals. Some prefer the maximum lease term of 5-6 years, others are limited to a short-term lease, often measurable in months. Each Lessor has a certain focus, even if he changes over the years depending on the situation.

The above does not mean to say that the Lessor can not leave his “comfort zone”. At the same time striking a deal, which is out of the lessor’s focus usually carries with it additional financial burden for the lessee.

For a prospective lessee, it is sensible to look for lessors who specialize in the leasing the needed asset, feel comfortable with the amount of the lease, the term of the lease, and all other requisites of the deal.

  1. The Lessor risk apetite

As we will see in the next step of the lease practice, each Lessor, in one way or another, performs a credit rating of the potential lessee. This analysis naturally leads to different outcomes for the various lessees. Some lessors are only looking for top rated borrowers, who have never defaulted on their credit obligations, have an excellent cash flow, and the prospects are just to increase it. Others specialize in risky lessees. Naturally, there are many nuances of tolerable risk between the two extremes, which the lessors are willing to take.

It is sensible for the prospective lessee to have a good personal assessment of his / her creditworthiness. He can check his file in the Central Credit Register at the National Bank, because the same information will be used by the leasing company to determine the history of future lessor’s former credit behavior. Then you have to look for a Lessor who will be willing to take that risk. Deviating from this approach poses a threat either to make the lease deal impossible or to slow it down considerably. The own creditworthiness analysis may also be helpful and sometimes sobering, which is not necessarily a bad thing.

  1. Lessor delivery capabilities

Some leasing deals also imply easy delivery. The delivery is negotiated by e-mail and telephone and is completely straight forward – for example, the purchase and delivery of a new car from the respective dealer for Bulgaria. At the same time, some leasing assets are much more sophisticated for purchase and delivery. These may even be custom-made incorporate a delivery term of six months to one year. Industrial equipment, electric generators, expensive vehicles and all the specific assets are quite complex to supply. For such leasing transactions, excellent coordination will be required between the supplier, the Lessor and the lessee. It is clear that the supplier is specialized in manufacturing the selected asset. It is also clear that the lessee who needs the asset has the necessary expertise. It is important that the Lessor is also up to speed.

It is important for the lessee, especially if the lease asset is more sophisticated for delivery, to make sure that the selected Lessor has the necessary experience in delivering the selected asset. This will ensure the conclusion of a good delivery deal, the necessary warranty conditions, the necessary control of the payments to the supplier, and even sometimes – price reduction.

  1. Long term partnership with the Lessor

It is possible that the lessee needs only one leased car and that will be all for the next ten years.

For many lessees, however, this is not enough. Some will want to replace the new car now with another one after 3 or 4 years. Others will want to buy a second, third, and even a whole fleet of cars. Some will seek a Lessor to support them in financing and renewing their fleet, financing the equipment of the new workshop, and so on.

Lessors also have different agendas. Some are actually targeting single lease deals and are not looking for repeat customers. Others not only look for new deals, with their already tested old clients, but are also willing to give different bonuses to them for each subsequent deal.

It is reasonable for the lessee to look into the future, as much as this is possible, and then to find a Lessor, who can meet the current and future leasing needs.

  1. Financial capabilities

It is reason to accept that every Lessor will easily be able to lease a new car. At the same time, not everyone will be able to finance a whole fleet of 100 cars. The financial capabilities of different lessors are not the same.

It is advisable for the lessee to be familiar with the scale of his future Lessor and his capabilities. Concluding transactions on the edge of the lessor’s financial capabilities is not a good idea. This may make the service more expensive, more difficult or even worse.

In conclusion, the lease transaction, unlike many other deals and services, implies a long-lasting interaction between the Lessor and the lessee. Relationships between the two parties can grow into a partnership and this is a guarantee of getting an optimal leasing service. The leasing service satisfies a need of the lessee. Hence it is somehow his responsibility to find such a Lessor who can actually become a leasing partner for the current and for subsequent leasing deals.