Executive Summary
A Guide to Equipment Lease Financing
By Angie Sharma
This research paper was written to serve as a guide to equipment lease financing from a perspective of a lessor and lessee. The basics of equipment leasing such as leasing types and loan versus lease are detailed in order to set a foundation. Issues and benefits of equipment lease financing are also evaluated from an accounting and economic perspective. Guam’s current equipment leasing industry and competition are examined with detailed transaction structuring and profitability analysis. A former competitor, Personal Finance Center, at one time had offered equipment lease financing. Analysis and results for their failure are examined and presented. Finally, a sample case study is presented with detailed analysis of lease structuring terms and conditions. The main sources of information for this research consisted of public documents, books, periodicals, trade publications, various Internet sites, extensive interviews, surveys, and previous management reports. Further insight was gained by obtaining and analyzing a sample case study from competitive banks. Manuals and credit underwriting guidelines from competitive banks were also obtained. The following major findings are based on the information collected and presented in this paper: 1) there is a market for equipment lease financing; 2) there are benefits to leasing for both the customer and bank; 3) of the six major banks on Guam, only two banks offer leasing products; 4) the leasing market has grown by 10 percent in the last three years despite Guam’s depressed economy.
The executive management of Citizens Security Bank is particularly interested in expanding its current market niche which includes commercial clients. Based on survey results, it is acknowledged that there is a market for equipment lease financing. In order to establish a favorable equipment leasing product, it is essential for banks to follow the following guidelines: 1) price every transaction to make a profit; 2) demand extra collateral when a credit is weak; 3) frequently evaluate equipment as to its collateral and residual values; 4) maintain an infrastructure for disposal and/or resale of assets; and 5) orient towards profit, not volume. This paper presents a practical insight to equipment lease financing. Questions from the aspect of “what is equipment lease financing?” to “structuring a lease transaction” are examined. This paper is essentially prepared to serve as a guide to equipment lease financing for the management and staff of Citizens Security Bank.