ISO Opportunities
THE REAL WORLD OF LEASING

by Phil Britt

   Leasing can be the lifeblood of an ISO's business, particularly those ISOs who work with small merchants, according to industry experts.
   Leasing enables merchants to use equipment they could otherwise not afford while providing ISOs with "frontloaded" payments for leases at a profit higher than for straight sales.
   According to Dennis Buxbaum, AVP-Leasing, Retriever Payment Systems, "For a merchant, getting started in business takes time and money; managing a business can be a challenge. The money outlay to start a business can drain a merchant's cash flow and put a crunch on plans and development. Often, the merchant does not have or want to put the cash up for equipment for their store, they look to finance. Leasing offers that to them, with flexible terms and little or no money down, merchants are up and running and accepting all forms of payments with no money out of their pockets."
   Yet prices and margins for leases have come down significantly in the last 10 years due to increased competition.
   Ten years ago, it was easy to get lease payments of $50 a month for a POS terminal. Now monthly lease payments are about $30 a month in the most competitive markets, according to Lee Ladd, Founder of Ladco Leasing, Thousand Oaks, Calif. Ladco, founded in 1979, is now a subsidiary of U.S. Bank. Leases for some more advanced equipment, particularly in non-competitive markets, can run as high as $89 per month. Leases usually run for 48 months.
   The competition comes from other ISOs and from the secondary market. With the failures of numerous companies over the last few years, there is a significant amount of used but very serviceable equipment that competes directly with newly leased machines. Some of the used equipment is also offered on a lease basis, according to Richard Zendel, President of CardMax, an ISO in Coconut Creek, Fla. However, a merchant who can acquire a second-hand machine for a few hundred dollars may do that rather than pay some $1,400 over the life of a four-year lease.

Lease Margins

   The ISO who can sign two to four leases a week can earn "a very nice income," according to Zendel. "It's like capitalism in its highest form, but there is a flood of independent agents entering the market."
   Zendel says 80 to 90 percent of his business comes from leases, primarily from Florida and offshore merchants. Other ISOs do a third or less of their businesses via leases.
   The exact amount of earnings can fluctuate greatly, based on the merchant's credit quality. Lease companies will pay more for A or top-rated credit than for lower-rated credits.
   The credit rating determines the lease "factor". Lease factors run about .029 for A credits to about .0495 for D/E credits. To calculate the payment to the ISO, take the monthly lease payment and divide it by the factor. For example, a POS machine leasing for $29.95 per month would bring an ISO $1032.75 for an A credit ($29.95/.029), but only $605.05 for a D credit. Some lease companies use slightly higher factors. Others use slightly lower factors. Remember, the higher the factor, the lower the revenue for the ISO.
   Ratings run from A to E. The lease companies pay higher rates for the better credits because those firms, not the ISOs, assume the risk once the papers are signed. If the merchant defaults, there is no immediate cost to the ISO, though lease companies that see too many defaults from a particular ISO will stop doing business with him.
   Depending on the credit quality, the ISO will typically earn $600 to $1,000 for each terminal he leases (based on a $29.95 monthly lease payment), which is often more than he would make if he were selling the machine. The reason is that he receives profit from the sale of the machine, and from the portion of the lease payment that represents a finance charge (though it's not listed as such). Upon approval of the merchant's application, the lease company will pay the ISO in as little as three days, and sometimes within 24 hours. Payments can be made via ACH to the ISO's account or with a check.
   Also affecting the income equation is the ISO's own business niche. Some ISOs may opt for less money up front and more from the merchant's monthly processing. As mentioned earlier, leases are the mainstays of some ISOs businesses, while representing a very small portion of other ISO's income.
   ISOs who are more closely associated with banks tend to do a higher percentage of sales than their counterparts because the banks don't want to be involved in the small ticket leasing business, says Brad Kaiser, Vice President for Midwest Payment Systems, Cincinnati, Ohio. ISOs affiliated with finance companies more familiar with small ticket items tend to do a higher percentage of leasing, Kaiser adds.
   Keiser recommends that ISOs offer both purchase and lease options to their merchants.
   Zendel adds that ISOs can command higher prices ($39.95 to $49.95 a month) for leases in non-competitive markets than in competitive markets ($29.95 amonth) like Florida.
   The end of the four-year term signals an opportunity for the ISO to sell the merchant upgraded equipment, adds Peyton Hunter, Senior Vice President for Transaction Payment Systems, Morristown, N.J.
   "Leasing allows a merchant to upgrade to state-of-the-art equipment [for a fee]," says Corey Saftler, President of Integrated Leasing, Englewood Cliffs, N.J.. "Without that provision, the merchant would stay with the equipment that he's already invested in."
   Others say merchants usually don't upgrade until a lease ends, though the lease itself helps establish a sales cycle the merchant who's comfortable with the lease payment may be willing to continue to pay the monthly fee. So, at the end of the lease, the merchant would be looking for more for his money, rather than looking to end the payments. That's how some merchants have transitioned from a simple POS machine several years ago to a POS terminal that includes a printer to a terminal that includes credit, debit, a PIN pad and other value-added features, Saftler says.
   The ISO shouldn't wait until the lease is through, but instead should start planting the seeds for the upgrade several months earlier. Otherwise he could lose the upgrade sale to another ISO who is doing more advance work to land the sale.

Setting up a Leasing Program

   The application process itself is simple, usually involving a one-page application. But some homework is required first. The ISO who wants to set up a lease program needs to make sure his own credit is in order, according to lease company executives. The lease companies typically look into the ISO's credit background, standing in the community and his relationship with his processor. The applications ask for references, which the lease companies diligently check. Some lease companies won't do business with an ISO until he has six or more months of business with a processor.
   Finance companies closely scrutinize ISOs to help protect against fraud. The industry is rife with fraud from unscrupulous ISOs writing deals for non-existent merchants, according to Richard Hahn, Vice President of Sales for Northern Leasing Systems, New York. Most lease companies handle too many deals to physically inspect each merchant's place of business. Some will try to confirm the deal via telephone. Others rely on the due diligence they did before agreeing to do business with the ISO.
   "We don't just take people off the street," says Saftler. "We try to be as diligent as possible." So Integrated checks the ISO's background with the ETA and with regional associations.
   So those working for ISOs now who are planning to go on their own should be aware that it will take a while before they will establish their own history with a processor. So it will be a few months before a new ISO will be able to offer leases.
   "It's not as easy as it seems," Saftler says.
   The ISO receives his money shortly after closing the deal. The lease company, on the other hand, relies on the monthly payments. If the merchant defaults, the lease company, not the ISO, is stuck with the uncollectable receivable.
   Lease firms will drop an ISO if he submits too many poorly rated (D or E) merchants for approval, even if those merchants and their businesses are legitimate. Most want a mix of A through C credit applications and will accept only a minimum of lower credit.

Selecting a Leasing Partner

   "In selecting a leasing partner it is critical to do your due diligence on the strength and reliability of your funding source" says Bill Healy, President of Lease Finance Group, a unit of CIT Group Inc. "The ISO who is committed to being very successful over the long haul needs to align themselves with a strategic partner who is equally committed and financially sound". "LFG, for example, not only offers excellent rates, but also has proven to be very consistent, dependable, and solely focused on funding and servicing the ISO community".
   Accepting too many poor credits can result in the downfall of a leasing company. For example, Leasecomm, Waltham, Mass., is still servicing its existing accounts, but isn't accepting any new credits. According to Richard Latour, Leasecomm President, the company's investors decided to no longer fund new leases because "credit quality in the current lending environment has caused some of our core microticket financing to become unattractive.
   Others in the industry say that Leasecomm was the victim of its own aggressiveness, accepting too much "bad paper." Lower-rated credit has a higher chance of not paying the full lease amount.
   So working with a lease company that accepts too much bad paper can leave the ISO without a partner in the future. Some ISOs, like Zendel, work with more than one leasing company. Some lease companies pay a little bit more for leases than others. Some accept a higher percentage of lower-rated credits. Others grade a little more easily. So what is a C credit for some might be a B credit for some others. The higher the grade the lease company gives the merchant's application, the higher the payment it makes to the ISO.
   Saftler recommends that ISOs look for lease companies that have consistent criteria in their approvals and credit ratings. Inconsistent criteria can spell trouble for the leasing company and the ISO.
   Just as different lease companies accept different mixes of credit, others accept only certain leases. Ladco, for example, doesn't offer leases on software because too many homegrown software packages, which some ISOs had written and attempted to lease through Ladco, can fail.
   Still other lease companies are more prompt in payment or more prompt in service.
   Northern Leasing, for example, prides itself on top-quality service, according to Hahn. Ladd sees Ladco's prompt payment, service and reputation as reasons for ISOs to choose his firm.
   "Selecting a leasing partner is an individual decision," says John Arato, Senior Vice President for Golden Eagle Leasing, Ridgefield, Conn., a wholly owned subsidiary of Hypercom. "Some ISOs continually look to make an additional $5 on a lease. I wouldn't run my business that way you eventually hit the law of diminishing returns."
   In other words, the leasing partner who pays a little more may not provide the same service or speed of payment of those who pay a lower rate.
   Though Golden Eagle became a Hypercom subsidiary more than two years ago, it leases non-Hypercom as well as Hypercom equipment. ISOs want to work with companies that lease equipment from various companies, not just a single brand, Arato says.
   Zendel says his criteria for using Northern Leasing and Integrated Leasing are the companies' quick response to problems and their consistency.
   "You know what to expect," Zendel says.

Selling Leasing to the Merchant

   Several experts agree that selling leasing to the merchant, particularly small merchant, is relatively easy.
   "For a small business, $800 to $1000 for a POS machine is a relatively large nut," Zendel says. "It's much easier for the small business to pay $29 to $49 a month for a lease."
   "You're selling payments," says Saftler, who adds that merchants are even more attuned to the idea of monthly payments when the economy is soft, as it has been lately.
   Arato recommends breaking down those payments even further when proposing the sale. Rather than discussing $29.95 a month for a lease, talk about the ability to accept credit and debit cards (and any other feature the device might have) for "a dollar a day" or "the cost of a cup of coffee a day," Arato says.
   Zendel and several others recommend leading with the lease, then offering to sell the terminal to the merchant, rather than leading with the sale and following up with the lease.
   Merchants who don't want to be locked into 48-month leases can opt for a shorter-term rental program. Rental programs tend to run 12 or 24 months, with monthly renewals thereafter. The rental programs provide less revenue to the ISO than lease programs.
   Whether a lease or a rental, these programs can help an ISO build a business with merchants who otherwise could not afford the POS machines, despite the business need for the equipment.
   "It's difficult to be in business and not accept plastic," Hunter adds.