Micro leasing has grown into a very profitable and exciting subset of leasing in the last few years and will continue to be so in the future. While the term “micro” has become fashionable thanks to Mohammad Yunas’ creation of the original micro loan, the term may not have the same definition for everyone. It would therefore be helpful to first define the term “micro” as it pertains to leasing.
Micro leasing in the context of leasing is any transaction which has a total value under 50,000 in local currency, be it sterling, euros or US dollars. Further, micro leasing typically relates to transactions that are comprised of small assets that are involved in what is generally flow business that does not require hands on assistance, unless it involves specialised situations.
Micro lessors fall into two categories, the first are larger funders who chase high volume and lower margins. These flow lessors are characterised by being led by process and systems and often use an auto scoring system. The second are the smaller funders that keep an emphasis on the deal and the relationship with their introducer. These funders are characterised with much lower volume size, higher margins and, most often carry a specialism in an area or two of funding, such as high-risk transactions, specific sectors or asset types.
While not all micro lessors are specialists those that choose to pursue a niche are able to achieve higher margins. There are a number of reasons for this. Firstly, due to specialist knowledge in one area the lessor is able to become an authority or “go to funder” in their desired speciality.
Secondly, specialising in one area allows the lessor to really understand the asset class and the customer that would finance it. It also provides them with a level of intrinsic knowledge that larger volume lessors do not have.
The larger lessors are unable to gain this specialist knowledge because they need to move through each transaction quickly due to the demands of being a flow lessor. Because of these needs the larger lessors often cannot or will not dedicate resources to gaining the knowledge to become the authority in these diverse specialist areas and therefore remain generalists.
By comparison, small funders, because they are able to focus on fewer transactions, are able to focus and gain this specialist knowledge to become the chief authority in their chosen niche.
Day-to-day challenges for micro lessors vary. Larger flow lessors need to ensure they touch the deal as little as possible and must rely on robust systems and processes. Auto-decisioning and a strong internal sales department are often part of this equation.
Niche players look at the day to day from a different stand point, touching a deal needs to be balanced with the needs of customers on the transaction.
The real focus for the specialist is their relationships with their introducers. As there are not as many sources of introduction for the smaller funders these are key. Thus the small lessor in these cases will always to look to protect and funher the needs of the relationship over how many times they may have to touch a transaction.
Funding can be a major obstacle for micro lessors both large and small. The differentiator is whether the lessor is a bank lessor or not. Bank-owned funders typically have no issues with raising funds because the bank itself will provide their needed capital; however the independents, both large and small will have funding challenges.
Larger independents once they have achieved critical mass can take advantage of existing funding mechanisms, such as block discounting, warehousing and ultimately securitisation. This is based on their ability to fund themselves to large volumes and scale quickly to take advantage of these mechanisms.
Niche and smaller independents however by their very nature are often excluded from many of these funding sources as they are often too small to securitise or due to the nature of their specialism they are excluded from standard funding packages. For example a funder who concentrates their portfolio on high risk credit or on laser medical equipment may find many portfolio funders unwilling to finance their growth and this is a reality that they must become accustomed to.
Due to this reality, niche and smaller independents have to rely on either creating unique funding models or must rely on other sources of fund raising, for example high net worth individuals and family trusts, to finance the growth of their organisations.
While smaller funders are not excluded from engaging with larger funding institutions, the process is typically that much longer with greater reporting, investigation and ultimately higher barriers to entry than experienced by more established, larger funding organisations.
In addition to these challenges there is a good deal of misunderstanding in the market. A study by the Alta Group USA found that the average US independent had a size of US$300m and that small independents had a size of US$80m. When financiers hear numbers like this, they assume that all markets have large capacities for financing.
Unfortunately, many of these financiers do not read the entire article to learn that the independents described in the above article are middle market players with average ticket sizes of US$500,000 or more, and this creates a false expectation in the minds of outside financiers of growth and ability in smaller markets and in specialist niches.
Therefore for the smaller and newer micro lessors who are independents it makes it very difficult to manage the funding process. Consequently, it can take between three to five years to establish one’s company and take in outside funding as a niche player, while flow players can accelerate this due to the volumes they may quickly drive.
Operationally niche lessors must stay lean, this often means that staff must be cross-trained to a high degree and must also be relied on to perform multiple functions. This can make it harder to find the right talent to join the organisation due to the demands put on the individual. However it also means that once new employees catch the vision of the company they are more likely to buy into it and stay for the long haul.
Larger lessors while finding it easier to hire staff can find it harder to keep and motivate them due to their potential size. The reality of a larger company makes it easier for staff to fall through the cracks or to hide from accountability; it can also become easier for less desirable hires to join the company. Larger lessors then need to invest in self development and growth programmes and other extra perks in order to keep strong talent from leaving.
In both cases lessors need to monitor their staffing costs with their bottom line. Staff costs can sky rocket and both organisations can and will typically make an argument for additional staffing but, by effective cost control in this area a lessor can move to profitability quicker or remain profitable longer.
While staffing must be closely watched, some of the most important staffing is the risk management team. Effective and aggressive risk management will pay back dividends and protect the company’s investments. A strong risk department is key for a micro lessor, they will ensure that due diligence is carried out not just on the customer themselves, but also on the introducer and on the supplier of the equipment.
The risk managers for a micro lessor must also ensure that the lessors have a solid exit strategy in place for each and every asset they might finance, this includes, auction, third-party sale and in some cases abandonment.
The risk department of the lessor has an internal and an external function. The internal function not only credit adjudicates but will also run part of the collections function. For a micro lessor this is key.
A strong internal collections department will effect smart recoveries on live portfolios and save on legal fees down the road. It is important to have the right people on the phones in the collections seat.
However, when internal collections fail, it is just as important to have an external company on contingency to work as a collections agency prior to stepping into the legal arena. Often and with minimal cost, these collection agencies can collect a substantial amount of a micro lessors debt without having to transfer the case to the court system.
For some clients however, the court system is a necessary step and in this case it is important for both a larger and smaller micro lessor to keep a couple of firms on retainer in case one of their firms is already instructed by a competitor or claims a conflict. Nothing is worse than not having any options when it comes to using your legal firm. While it is important to listen to the story of the lessee it is also important to not be too sympathetic that you do not move them to the next phase of collections.
Many micro lessors receive their business from an introducer or broker and it is important to understand how this market works. While not the case for all funders, many of them live and breathe based on their broker relationships. When this relationship is functioning correctly the broker acts as a pre-adjudicator, a sales force, collection agent and repossession firm.
While this necessitates that an introducer goes through a rigorous vetting process, it also means that they have the potential of becoming a true partner to the lessor and this is the case for both niche and the flow lessors. This is particularly pertinent as it enables an introducer to gain a clear understanding of the funders business and appetite. This ensures they only send transactions that fit the funder’s model. Ultimately this results in a greater number of deals being approved and transacted, which for the broker is terrific as they are only paid on completed transactions.
Often brokers are comprised of former staff exiting a funder’s employment who wish to build on their experience in the industry. This brings additional benefits as not only do they come on the scene with a solid knowledge base but it means they have a reputation to protect. Today one will find that most brokers value their brand and their company over any single transaction and will always look to protect their name in the marketplace.
Finally, because brokers are on the front lines talking to a large number of lessees and customers they have a greater sense of what is going on in the marketplace and what might occur in three and six months coming, certainly they have a better sense then a funder might.
A wise micro lessor, whether flow or niche, would do well to keep close to his brokers to stay close to this bastion of knowledge, if for no other reason than to gather information from them on a semi-annual basis.
Micro-leasing is an exciting field and while this article has attempted to give an overview on the topic it is by no means a complete analysis of the market. The amount of change the industry is undergoing at this time and the upcoming regulation in areas such as the United Kingdom and the United States will undoubtedly cause upheaval and further transformation in the playing field. However, there is a lot of opportunity in this space and a savvy and intelligent lessor, whether flow or micro, could easily grab a section of this market in just about any region and make it their own and do it with a high confidence of success.
About the author:
Rev. Dr. K. Bill Dost is the President of D&D Leasing in Canada, and the Managing Director of D&D Leasing UK Ltd. He is the President of the Toronto Chapter of Entrepreneurs Organisation, sits on the Asset Finance Directors for the Finance and Lease Association (FLA), on the board of the Asset Finance Professionals Association and a Founding Fellow of the Leasing Foundation. The D&D Leasing group of companies, now in their 13th year are “C” funding specialists and can be found at www.danddleasing.com.
This article was written by Rev. Dr. K. Bill Dost, Managing Director, D&D Leasing UK, Tel:+44 20 7618 0926. Mob: +44 75 4022 2258. Fax: +44 20 7618 0941. Email: kbd@danddleasing.co.uk. Website: www.danddleasing.com.
