Equipment Leasing: profitable? Yes, but what about the risks?

Leasing equipment to small- and medium-sized businesses is a potential source of new revenue for community banks, claims Michael Fleming, president of the Equipment Leasing Association, Arlington, Va. About one in five community banks currently offers leasing services.

Community banks involved in this area typically lease office machines, computers, medical technology, vehicles and other assets.

Smaller banks often find a "niche" for themselves because larger leasing companies sometimes overlook small businesses, individual customers and other market segments that community banks are well suited to serve, Fleming notes.

Perceptions of risk have kept some community markets from entering this market, which Fleming calls "highly profitable." He argues, instead, that equipment leasing is a way for a bank to create a low-risk revenue stream.

The market for leasing equipment was expected to reach $208 billion by the end of 2003. Historically, about one-third of the nation's total investment in equipment ks placed in leasing. Nationally eight out of 10 companies lease equipment.

Equipment leasing delinquency rotes are low, says Fleming. The average write-off was 0.8 percent of the average net lease receivables balance, according to the Equipment Leasing Association's 2002 Survey of Industry Activity. More than 97 percent of average receivables were current (less than 30 days).

Financing terms are much shorter with leasing than with traditional loans, Fleming points out. The equipment itself secures the deal, and the financing is usually for equipment used in daily business, such as computer and telephone systems--items on which a business is unlikely to default.

Residuals assumptions, historically an uncomfortable aspect of leasing for banks, are regularly exceeded by the equipment leasing industry, Fleming says. "Rarely do lessors take losses on resales or re-leases," Fleming says. Banks have a built-in safeguard: limited after-lease equipment values.

Fleming offers the following advice for community banks planning to enter the market: Proceed slowly and methodically. Talk to bankers who have already entered the leasing arena. Their feedback can help a bank decide whether to establish a private-label program using an outside supplier, affiliate with a third party already well established in the field, or create an in-house leasing division.

An in-house division may offer more control, but most community banks enter into a referral program, a third-party agreement or a private-label program with an established leasing company, he adds.

To learn more about leasing or to find a leasing company, see the ELA-sponsored website, www.LeaseAssistant.com.

Equipment leasing delinquency rates are low.

The average write-off was 0.8 percent of the average net lease receivables balance.

More than 97 percent of average receivables were current (less than 30 days),

--Equipment Leasing Association's 2002 Survey of Industry Activity.