A prospect's most apparent needs won't be met if the budget doesn't allow for replacement of systems. It's common to find buildings with 25-year-plus unitary equipment that has "crashed and burned." Energy consumption and repair bills become unbearable, while comfort isn't even an after thought.
However, if a prospect is shown how to acquire new equipment with no cash outlay, things get exciting. Energy savings, along with maintenance and repair savings, will typically make the monthly lease payments.
Lease capital isn't new to our industry. Even though it's been available for decades, the art is in how to sell lease capital. Following are the four "W"s of lease capital:
WHAT is lease capital? Unlike bank loans, equipment leasing never requires adjustable rates. It's a lease from 60 to 84 months with a $1.00 buyout at the end of the term. Typically, a lease capital arrangement requires NO collateral, or personal guarantors. The size of lease contracts can range from $5,000 to well into the millions.
WHEN is it appropriate to offer lease capital to a prospect? When replacement of mechanical systems is both obvious and imminent, and the prospective customer can't fund the replacement, or doesn’t want to spend the funds. Schools, businesses, and churches eventually experience old, tired equipment.
Breakdowns become frequent and efficiency is very low. These building occupants probably won’t operate without air conditioning and heating. They also won't close the doors. With no capital to work with, their backs are against the wall.
WHO are the primary target prospects? Owner-occupied office buildings, schools (both public and private), churches, government buildings, medical clinics, and manufacturing facilities all are great prospects.
WHY would a contractor or customer enter into a lease agreement? Most profit-making organizations want to hold onto their cash. They also wish to keep their credit line at the max. Many building owners don't want to mortgage the property, nor do they want to spend the money for a big project. Timing also becomes an issue. Doing a changeout immediately starts the energy savings, maintenance savings, tenant satisfaction, and productivity improvements at once. In many cases they don't have the option of waiting for another year.
The contractor benefits from closing sales that would otherwise be lost. Progressive billings and final payment upon completion gives the contractor a faster payment procedure since collections and paper work are the responsibility of the leasing company. Progressive billing/payments usually occur on larger ($100,000 plus) projects that stretch over a period of months. The financial arrangements, or progressive billings, are made with the leasing company in advance, with a sizeable amount paid upon arrival of the equipment. In most cases, this is a better financial arrangement for the contractor than collecting directly from the building owners.
You don'’t have to be a financial wizard to work through the lease capital paper work. Leasing companies have websites with simple spreadsheets which require only to enter the amount of the sale and the term in months. While leasing companies won’t take on high-risk applicants, I have found them to be far more lenient than banks.
A summary of the benefits for the building owner:
- No down payment.
- No cash outlay.
- Doesn't affect their line of credit.
- Tax advantages (unless non-profit).
- Near positive cash flow.
- They'll have new HVAC systems.
- Energy reduction.
- Maintenance/repair savings.
- Tax credits in some cases.
- Energy rebates.
In selling the lease capital concept, begin by asking the prospect, "Can you operate your business/church without conditioned air?" Always a no. "Do you have $200,000 to replace?" Again, no. "Would you consider us installing new systems if you had to, for very little cash-out-of-pocket?" This generates a positive response. Often they’ll ask, "What’s the catch or down side?" My pat answer is, "We weren’t here last year".
Make sure that the prospect understands that this is a lease and not a bank loan. While the cost of the money is not much more (sometimes less) than lending interest rates, I steer them away from quibbling over interest rates. Worst case scenario, send them to their bank.
In most cases, I have found this to be a slam dunk.
Earl King is the founder of King Productions International, a commercial HVAC contracting sales consulting firm based in Texas. He speaks to associations and trade groups, as well as writing this column for Contracting Business.com. Email Earl with any questions or comments at: [email protected] or call him at 515/321-2426.