With 100% bonus depreciation back on the table, it’s time to ditch the bid mentality. Scott Kiley shows how smart structuring and consultative selling can turn true leases into your competitive edge.
Wow! How quickly things can change in our industry. My last article referenced the 40% bonus depreciation in effect as of Jan. 1, 2025. Now, the Big Beautiful Bill made 100% bonus depreciation permanent, and retroactive, to all new and used equipment purchases made on or after Jan. 20, 2025 (Inauguration Day). So, if you bought equipment at the beginning of the year when Joe Biden was president, you are out of luck and cannot write off 100% of your purchase. Making this retroactive obviously didn’t influence any company’s 2025 equipment purchases made before the passage of the bill, but it allows Donald Trump to ring the political victory bell when it comes to promoting his pro-growth tax policies.
If you subscribe to Suite by Monitor, hopefully you read my Op Ed piece, in which I made the point that although there are a lot of positive benefits to the industry from 100% bonus depreciation, most notably providing a strong tax incentive to buy equipment, it can also create more challenges in selling true leases. This is especially true in the “better credit” bank lessor space, where profitable lessees want to take the 100% current year deduction on equipment purchases rather than give it to a lessor. This means you must continually promote all the benefits of a true lease to lessees:
• Conserves working capital
• 100% financing including delivery & installation costs
• Flexible payment terms with skip payments or lower seasonal payments
• Leases with meaningful residuals offer lower payments than loans
• Provides after-tax financial benefits (100% of lease payments are deductible)
• Companies can acquire equipment and stay below leverage covenants
• Lower right of use asset and lease liability (not debt) recorded on the balance sheet
• Predictable operating lease expense recorded on the income statement
• Sales tax charged on monthly rents avoids paying sales taxes upfront
• Preserves bank credit lines and gets expertise from equipment finance specialists
• No covenants or cross collateralization
• Protects against equipment obsolescence as the lessor takes downside residual risk
• Offers flexibility with end-of-term options to purchase, renew or return equipment
Getting back to the subject of this article, the prospect you have been calling on for months is purchasing $9.5 million in machine tools and is requesting a financing proposal.
ART OF SELLING TRUTH NO. 4: REMOVE ‘BID’ FROM YOUR VOCABULARY
My first piece of advice to be a “winner” and not a “bidder” is to remove the word bid from your vocabulary and get out of the bid mentality. When I was a sales manager at GE Capital, directing a team of 12 regional managers around the Midwest, I forbade my team from using the word “bid” when discussing a new deal with a prospect. Look, the equipment finance space has seen a steady march toward “commoditization” that cannot be ignored and I believe that “bidding” on a deal is one of the leading contributors to “commoditization.” Bidding means simply responding to a request for proposal (RFP) on the prospect’s terms, making it easy for them to line up proposals side by side, focus on the interest rate and choose the cheapest option.
Suppose you have been bidding on deals and your success rate isn’t to your satisfaction. In that case, I encourage you to recalibrate your approach from offering a “bid” to providing a different three-letter word, a “CFP” or customized financing proposal. This may sound like form over substance, but I can assure you it is not. To provide a CFP, the prospect must be willing to not only answer the general questions from my last article, but also show a commitment to you by answering more detailed questions about their financing need, such as:
1. Are there progress payments required by the vendor that you would want us to consider making on your behalf?
2. Is this equipment purchase tied to any new contract? If so, what is the length of the contract?
3. Does the installation of this equipment require additional costs that you would typically capitalize on in this project? If so, what would the total “soft costs” be that you would want us to consider financing in the lease?
4. Would you entertain alternative structures other than the one requested in your RFP if I thought they could benefit your company?
5. What incremental borrowing rate (IBR) are you going to use to account for the true lease option? Should I assume operating lease treatment would be beneficial?
Pro Tip: Accounting rules require the lessee to use an IBR equal to the fixed interest rate they would get on a loan matching the lease term. The higher the IBR used, the lower the amount booked on their balance sheet as a “right of use” asset and the corresponding “lease liability” — one key benefit of a true lease. In a normal-shaped yield curve where short-term SOFR-based floating rates are lower than the five-year swap rate (not like today), making sure they use the longer-term fixed rate as the IBR is especially important.
Using the consultative selling approach, you have gathered the following information about the prospect and the specific opportunity:
Garden Tools, Inc. is a $125 million annual revenue company that typically generates profits from $10 million to $20 million per year. They sell to Lowe’s and other hardware and garden stores across the U.S. Lowe’s has approached them about making private-label garden tools on an exclusive basis under a five-year contract that could increase annual revenues by $50 million, requiring them to purchase $10 million of additional machine tools and packaging equipment. Their funded debt/EBITDA is 3.50x, approaching their leverage covenant of 4.0x. The equipment will take nine months to be fully installed and operational, installation and delivery costs total $500,000. The vendor requires progress payments every three months. They have a $50 million revolver that is typically maxed out during the winter months when manufacturing capacity is highest, as they make the garden tools to be delivered in the spring. They have used leasing in the past, but only for computer equipment. They are open to a true lease option but would prefer a seven-year loan since, according to the CFO, “this equipment lasts a long time and we want to own it.”
SCIENCE OF SELLING TRUTH NO. 4: PRESENT A PROPOSAL FACE TO FACE
Now let’s generate a CFP, which brings us to the Science of Selling Truth No. 4: Never email a proposal and hope for the best. Insist on a Zoom call or in-person meeting to present it. I wouldn’t provide the proposal in advance unless they insist on it, and if they do, don’t send it too early. Your cover page should bullet point the key financial and operational benefits of your proposal based on the information they provided. The most important benefit of presenting your proposal in person (or via Zoom call) is that you can gauge an initial reaction and respond accordingly. My CFP would offer 4 options:
Option No. 1: A $10 million seven-year fixed-rate loan (including delivery and installation costs as they requested) at a rate of 6.5%, with a monthly payment of $148,495.
Option No. 2: A seven-year true lease with an Original Equipment Cost (OEC) of $10 million with monthly payments of $125,118 and an early buyout option (EBO) in five years at 47% of OEC. The advantage of this structure is that it offers an option to purchase the equipment at a fixed price in five years. The status of their contract renewal and new equipment technology in five years will allow them to make a smarter long-term ownership decision at that time. Offer to make progress payments due to the vendor with interim rent due when the lease starts in nine months. The payments are fully deductible for tax purposes, and this lease should qualify for operating lease treatment so they can fully expense the lease payments and book a lower asset and liability on their balance sheet compared to the loan option.
Their leverage ratio is approaching the 4x limit, so adding a large loan could be an issue. Lastly, as they ramp up this project and incur a lot of one-time costs, there is a possibility they won’t be able to use the $10 million tax write-off in 2026. Let them know your lease economics incorporate those tax benefits to offer a lower lease payment. If they purchase the equipment in five years, let them know their all-in rate to the EBO is 5.88%, lower than the 6.5% loan rate. If the facts in five years bring into question their need for this equipment long term, they can continue to lease it for two years and have the options to return, renew or purchase the equipment in seven years.
Option No. 3: Also an EBO lease with payments of $165,824 per month and skip payments ($0 payments) during December, January and February each year when their cash flow is tight. The average monthly payments are $124,368 each year. The EBO is also 47% of OEC in 5 years.
Option No. 4: A pure FMV lease without an EBO. Tell the CFO you are willing to assume the most aggressive residual on a pure FMV lease, so the lease payment is even lower at $118,283. I would say, “We take all the downside residual risk, as you can always return the equipment. If you want to purchase the equipment for FMV at the end, we must be reasonable in negotiating that amount, or you won’t be a long-term customer. If, for some reason, we can’t agree on an amount, you are protected because there is a third-party appraisal process to determine the FMV objectively. Do you agree that the lease options provide more flexibility and offer compelling
economics?
Pay close attention to how they respond, as their initial reaction will convey their biggest concerns about a lease, and be prepared to address objections head-on. My next article will cover potential responses to the most common objections to a true lease.
Pricing Assumptions on These Real-Life Options: Leases priced to 7% nominal pretax yield versus the 6.5% loan rate, payments in arrears. Internal rate of return (IRR) of the lease (payments + residual without tax benefits) is 5.7%, so 100% bonus depreciation enhances pre-tax yield by 130 bps (7% to 5.7%), so in this example, you are keeping 50 bps of tax benefits to the lessor yield. Residual is 20% for Options No. 2 and No. 3; and EBO has a 20-bps yield enhancement to 7.2%. With payments substantially lower on the lease, those independent lessors that don’t want to price in tax benefits fully can keep most of the tax benefits and still offer a lower lease payment than the loan payment.
SCIENCE OF SELLING TRUTH NO. 5: LEVERAGE BONUS DEPRECIATION
For the better credits who can use the 100% bonus depreciation, I encourage you always to show a lower payment on a true lease (and a lower all-in rate on an EBO lease) versus any loan option you provide and offer the lowest payment on a pure FMV lease. That is done by taking meaningful residuals and flowing through some, or all, of the 75 to 250 bps boost to the pre-tax yield (depending on targeted yield, residual, term and month of funding) that 100% bonus provides to lessor economics.
Admittedly, this is a bank lessor type scenario in terms of the economics, but the general concepts apply to how an independent lessor should approach a financing request from a prospect, if you want to increase your true lease volume. •
Scott Kiley is a seasoned equipment finance professional with over 35 years of experience in capital markets, indirect and direct originations, and syndications. As the in-house instructor for the Equipment Leasing and Finance Association (ELFA), he provides industry training, equipping professionals with the knowledge and strategies needed to excel in equipment leasing and finance. Kiley spent more than two decades at Fifth Third Bank, where he led the Equipment Finance Capital Markets Group as a Senior Vice President. Prior to that, he spent 21 years as a Vice President of Indirect Originations. His early career at GE Capital involved managing sales teams and driving tax lease sales for middle-market companies.
