Smarter Finance USA Blog

Should You use Direct Lenders for Equipment Leasing and Financing?

Posted by Rob Misheloff

As a husband and father, the best example I can set in the world is by helping others. That’s why I’ve built my career around helping my fellow business owners grow their companies. My hope is that this website and my company help you to grow your business and achieve your goals.

 

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Are you looking for equipment financing for your business?

Or for your customers?

Have you been told…

…that you should work with XYZ company …

…because they are a “direct lender?”

Why is it better to work with a direct lender?

Do Direct Lenders Have Better Equipment Leasing Rates?

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Sometimes, you can benefit by working with a direct lender.

In theory, because they cut out the “middleman” a direct lender might have lower rates than what you could get from a broker.

That makes sense, right?

I mean, a broker has to be paid too.

Of course, that assumes that the direct lender doesn’t have any salespeople to pay.

A very few specialty companies are completely online.

Since a computer does all the selling, it’s possible that those companies don’t have sales costs. 

(Which works about as well as outsourcing your customer service to Pakistan….)

Here’s the deal:

Don’t take my word for it.

Don’t take the word of anyone for that matter.

It’s really simple.

Get a quote from a direct lender.

Then get a quote from a broker.

Or…

Get quotes from whoever you dang please.

Whatever works the best for you… do that.

(But don’t let anyone tell you rates are lower because they’re direct… that’s just lame.

Read on to see why…)

Do Direct Lenders Have Better Equipment Leasing Programs?

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So… here’s a secret.

Most direct lenders can’t even be accessed directly.  

They are busy underwriting deals, not talking to customers.

In fact, we get a fair amount of business from direct lenders who like us.

(Smarter Finance USA is a broker).

You see, “true” direct lenders have only their own program.

An ethical direct lender will want you to find the program that is the best fit for you.

Since that may or may not be their program… they’ll often direct you to an honest equipment financing broker.

With that said… if you happen to contact a direct leasing source… that happens to specialize in the equipment you want to purchase… and your company profile… you could potentially save money that way.

But… your company profile… what does that mean?

Every direct funding source for equipment leasing has their own “credit window.”

If you’re a AAA credit borrower… you are best served working with a company that only services AAA credit.

Of course… some of those companies do only small ticket transactions.

For some companies that means deals from $5,000 to $35,000.

For others, it can mean $20,000 to $75,000.

Of course, some equipment funders only look at deals worth at least $75,000. Or $250,000.

Similar things are true for B, C and D credit borrowers.

… and don’t even get me started on startups.

Does this sound like a mess to you?

The truth is, if you call someone with only their own program to offer you, you could easily be declined when others would approve you for financing.

…or get rates that are worse than what you would get elsewhere…

(sometimes… not always…)

It’s even worse if you are an equipment dealer.

Go send your customers to someone with only one program to offer.

See how that works out.

Unless all your customers look exactly the same… you’re going to have a hell of a time selling your equipment working with a “true” direct lender.

But wait… what is a “true direct lender?”

Equipment Leasing Syndicators Vs. Brokers Vs. Direct Lenders

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Here’s another secret…

Most of the companies that call themselves direct lenders usually aren’t even lending their own funds.

Even if their name is on the leasing documents…

You’ll find this a lot:

Many companies use their own money to fund transactions… sometimes… and then they have what they call “syndication partners.”

Syndication partner is to leasing what sanitation engineer is to garbage men.

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It means they’re brokering the deals out.

Now, if it’s their name on the documents, that can mean they’re a discounter.

The only special thing about discounting means you make more money.

There are other responsibilities and costs involved with discounting… but here’s the big difference…

Brokers pocket a commission when they arrange a deal for you.

Discounters pocket the same commission, but also keep the first and last payment.

That’s where the word “discounter” comes from. They sell a discounted rental stream to a bank.

What that means is, let’s say you lease equipment for 36 months. You may be asked for a first and last payment in advance.

The discounter turns around and sells a 34-month payment stream to the bank.

That doesn’t make a discounter bad or good. It just is.

Consider this though…

Why would you care how much the leasing company makes?

If you’re looking for financing…

…get the deal that works best for you…

…whether through a broker…

…or a syndicator…

…or a direct lender…

…or the Jolly Green Giant.

Of course… there’s one issue we haven’t talked about yet…

It’s the whole “money flow thing…”

What the Heck is Money Flow?

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Most equipment finance brokers have no idea what money flow is.

Direct lenders are all too familiar with it though.

You see… direct lenders need a constant flow of money so they can fund their portfolios.

Consider:

A medium-size equipment finance company may have 20 salespeople.

If those salespeople are any good at all… they’re consummating an average of $250,000 a month in deal flow.

That means the funder has to have access to $5 million… every… single… month.

You want to know what happens?

It’s really amusing to watch, actually.

Let’s make up a pretend company.

We’ll call them “Leasing Dudes.”

Some months… Leasing Dudes will be waiting for their next infusion of capital.

Nobody tells the salespeople that. They have no idea.

All they know is that for a period of time, underwriting will start declining almost every deal.

No matter how much they whine and jump up and down, they can’t get deals done.

It doesn’t matter what argument they make… what they don’t know is that the money to fund their deal doesn’t actually exist.

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At some point in the future… Leasing Dudes will get an infusion of money. All of a sudden they’re flush with cash.

Of course… they’re paying interest on that money.

All of a sudden, all of Leasing Dudes’ salespeople can get most of their deals funded.

They have no idea why… and when that punch bowl is taken away… they’ll blame underwriting.

Of course… you don’t care about Leasing Dudes or how much commission their salespeople make.

But… that money flow can affect you… or your customers.

Now… brokers who are smart (…a few do, in fact, actually exist…) pay keen attention to money flow.

When I get a call from a new lender that is hungry for business… my ears perk up.

Especially the dudes that are new in the business.

For a brief period of time… their rates will be too low.

They’ll approve deals they shouldn’t be approving.

Eventually…

...as portfolio losses stack up…

...they’ll learn their lesson.

Similarly, of the dozens of funding sources available, most couldn’t care less if I or any other broker live or die in any given week.

But when all of a sudden, they start calling aggressively, we know they’ve got money burning a hole in their pocket.

Which means they’ll be loose cannons with those approvals for at least a few weeks.

(We know which wall to start throwing spaghetti at…)

The truth is… in some cases a strong broker can help you find these market holes and exploit them.

It’s not unethical either. It’s a free market.

If a new funder is handing out dumbass approvals like they’re candy… that’s not your problem.

The question is… would you rather be the victim of money flow… or would you rather take advantage of it?

Sounds like a way better value proposition than “we lend our own money.”

Right?

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Topics: Leasing

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