Weighing new profit streams - Leveraging equipment leasing

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Have you ever thought about the size of the Canadian equipment leasing market? Did it ever cross your mind, as a broker, that you'd have any reason to even contemplate it? Well, that's just the kind of research Dominion Lending Centres (DLC) executives have been conducting under the wire for quite some time - and it's beginning to pay off.

The national brokerage began rolling out DLC Leasing Inc to its brokers/agents in Alberta this past February, British Columbia stepped onboard in June and Ontario hopped on the bandwagon in July - in the hopes of taking advantage of this estimated $25 billion per year Canadian opportunity.

"We rolled out in Alberta first because we had so many agents in BC - obviously from being based here - and we wanted to make sure we worked all the bugs out," says Gary Mauris, president of DLC.

DLC's ancillary business story began at inception in January 2006. The company knew it wasn't only going to focus on mortgages, although that will always be its core business.

"We knew from day one that we were never just going to be mortgages - and it starts with our name," Mauris says. "We became Dominion Lending Centres - not Dominion Mortgage or Dominion Finance - because it was always our intention to add ancillary services."

Dominion Lending Centres was built on the premise that the company would eventually offer mortgages, equipment leasing, wealth management and consumer financing. "Obviously, we can only roll out things as we can manage them. And the equipment leasing has been something that we've been doing for a long time now - and spent a lot of money on," says Mauris.

Dominion prides itself on being the first Canadian mortgage brokerage to begin offering equipment leasing - encompassing everything from large industrial equipment to used vehicles to computer systems and beyond.

"Equipment leasing is the biggest add-on this industry's ever seen," says Mauris.

But the brokerage wasn't merely looking to build a referral relationship with an existing leasing firm - opting instead to purchase its own tried-and-true leasing firm and bring the company's founders onboard to form DLC Leasing Inc.

And with the firm - formerly known as Lease Quest - came a ready-made point-of-sale program called Credit Quest (referred to as the Filogix of the leasing world).

The response
"The response has been incredible," says David Hostetter, director of business development for DLC Leasing Inc, who previously owned Lease Quest with partner Andrew Parker, who also moved over when the company changed hands. "We weren't quite sure how agents were going to respond because it's a bit different of a business."

That said, Hostetter knew mortgage professionals were already dealing with a high percentage of business-for-self mortgage clients.

In fact, DLC estimates almost a third of mortgage customers are business-for-self individuals - a very encouraging figure considering how many businesses require equipment leasing, often multiple times throughout the course of a single year.

"This is such a great fit for our industry," says Mauris. "Statistically, 31% of all mortgages we write in Canada are for people who are business-for-self. These are people who, when they grow their business, they have to grow it out of their existing capital or go to the bank and try to set up a line of credit, which is very difficult. And we have a ready built-in customer base."

Of the approximately 1,100 agents - making up 97 franchises with 177 individual locations - spanning the country, Mauris estimates about 80% have already bought into the equipment leasing idea.

He says making the transition is simple, considering that brokers/agents can send a message out to their contacts about the available equipment leasing options and the phone starts ringing.

"Now all of a sudden with your existing database you can send out e-mails that say: 'Never pay cash for your equipment again. We'll finance 100%. Dominion Lending Centres now has equipment leasing available'," he suggests.

Each DLC website has also been set up with an equipment leasing button so consumers can apply online.

Show me the money
Over the course of your brokering career, it's likely that you have had multiple inquiries requesting your services to finance a variety of other products but no resources to turn these possibilities into reality.

There's no doubt that equipment leasing can be quite lucrative. Even straightforward deals can put $2,000 to $3,000 worth of commissions in a broker's pocket.

"The average gross basis point on a mid-ticket item is 800 basis points - eight per cent," says Mauris.

And when you do a high-end $1 million or $2 million lease, for example, the percentages obviously drop to one or two per cent or so - much like a commercial deal.

For instance, if there's a business-for-self client who wants to buy an equipment hoist that costs $25,000, the commission works out to eight per cent or $2,000.

Why continue to do mortgages?
Along with the lucrative nature of leasing deals comes the possibility that brokers/agents may want to wind down the mortgage side of their businesses and opt to become leasing specialists.

"We're really careful on how we roll that out," says Mauris, adding that he reminds brokers/agents that DLC's core business is mortgages but, as property markets soften, equipment leasing is another vehicle to use as an ancillary stream of income.

"I would say most of them are just taking what comes from their existing database," he says. "We do have probably 20% or 25% of agents that are saying, 'I'm going to take this to the next level. I'm going to sign up vendors in my city that are going to be sending me deals every month.' But we really look at it and say mortgages are our core business," Mauris adds.

"Equipment leasing has been one of our strongest tools for recruiting," he says. Agents can start the lease training as soon as they join DLC.

One reason Bill Handsaeme came over to DLC is because of the equipment leasing. The 20-year mortgage veteran made the switch in July and is pleased with his decision.

Handsaeme, president of Dominion Lending Centres Forest City Funding in London, Ontario, says the support offered by the brokerage, as well as the equipment leasing capability and the white label Dominion Mortgage, have really boosted his bottom line. In the two months he has been with the brokerage, he's experienced record volumes in both months.

"I don't know the leasing business that well, unfortunately, but I do have a lot of people that I've just hired - since July we've gone from 37 people to 51," he says. "And I'm averaging probably two to three interviews a week."

Handsaeme believes that, over time, he'll have to analyze his business and decide how to set it up to ensure both the mortgage and leasing divisions thrive. "The analyzing of this will probably require that we hire a leasing expert and then have people trained by that person as well so that they know how to go out and sign up dealers," he says.

He wants to set up his business in a calculated manner because he knows the reason mortgage brokering has worked so well is that it's a specialty. "I've always said the reason the mortgage business is as successful as it is is because we don't wear three or four hats. We have the edge because, you walk into a bank and that one person is supposed to know about loans, mortgages, deposits, insurance - everything - and how can you be really good at everything? You just can't be."

Handsaeme says his entire team is excited about the endless possibilities equipment leasing offers their businesses. "Everyone's truly excited, simply because of the recent announcement with GM, Ford and Chrysler that they're not doing incentive leasing any more. Certainly, Dominion leasing is now trying to develop something - we're told by the end of September - for auto leasing, so that we can then capture that part of the market as well."

Learning curve
What really ties mortgage brokering and equipment leasing together is the fact that both businesses deal with credit applications and business-for-self clients.

And the way DLC has set up its leasing division, its internal underwriting department packages the deals and sends them off exactly how specific lenders in the leasing realm would like to see them. The vast majority of lenders involved in leasing are names that brokers/agents typically wouldn't even know.

But before being able to start writing lease deals, DLC brokers/agents must undergo training.

"We wanted to make it very simple," says Mauris. "For the most part, professional mortgage brokers understand funding, credit, underwriting and taking applications. We didn't want them to have to learn a completely new industry. So we run a complete adjudication and underwriting system," he adds.

"It's just training them about the difference in some of the processes - how to use our internal systems and how to explain these things to the client," says Hostetter. "We do ongoing introductory session sales training and more advanced workshops on an ongoing basis through webinars."

Once a broker has undergone the required training, the broker can take a client equipment leasing application, send it into the underwriting centre and the underwriting centre shops the different lenders.

"Just like the bank, we give our agents a commitment - typically within 24 hours," says Mauris. The documents are then pdfed and e-mailed back to the agent, who then meets with the client for sign-off. This way, a broker never loses control of the customer.

Getting creative
DLC is astounded by the multiple ways its brokers have already been using the mortgage and leasing sides of their businesses together in order to get deals done.

"We didn't really anticipate all the creative ways they would use leasing. So what's happening is we have people solving mortgage problems with leases and vice versa," says Hostetter. "The creativity of this group and the way they're using these tools is amazing."

Donna Van Lier, broker/owner of Dominion Lending Centres Stellar Mortgage Corp in
Edmonton, and her team have had incredible success with DLC Leasing. She points out two clear benefits to leasing: 1) brokers can offer lease buy-backs that customers can use as a down payment on a home; and 2) agents can use a lease buy-back to remove a corporate purchase from a personal credit bureau, since lenders want brokers to debt service everything that appears on the bureau.

One of Van Lier's associates had an exceptionally profitable commission check in August thanks to DLC Leasing (see sidebar below).

Agents are also approaching local companies for vendor finance purposes. In this situation, they partner with a computer shop, for instance, and now every time someone comes in to buy a computer, the company can offer a lease through DLC Leasing.

All of the leasing agreements are lease to own. At the end of the term, there's usually a minimum buyout, as low as $1 or as high as 10%, depending on the lease and/or the equipment involved.

Mortgage rates versus leasing rates
Both mortgage brokering and equipment leasing cater to A, B and C clients, but the interest rates are steeper in the leasing world.

"Rates in our business run exactly as they do in the leasing business. The A clients with the best credit have very competitive rates and the C clients maybe are business-for-self, they haven't filed their income tax, they have no down payment or have some poor credit histories - their factor is based on a higher percentage," says Mauris.

A factor determines the interest percentage those with equipment leases pay on the loan. In many cases, businesses can write off up to 100% of their equipment leasing payments.

"People aren't so concerned because they're buying something for a $300 payment, but it's making them $2,000 a month," he says.

Hostetter adds that equipment lease rates cost more than a bank loan but considerably less than high-interest credit cards.

"There are a tonne of small business owners out there who have no idea where to go to even lease their equipment," says Mauris. "We found a huge edge."

The Australian comparison
The concept behind DLC leasing arose out of Australia, where brokers have been offering leases for quite some time.

"In Australia they have massive market penetration but, if you're a mortgage broker, you have mortgage financing, you have wealth management, you have consumer loans and you have equipment leasing. Equipment leasing is giant," says Mauris.

The main difference between DLC's model and what's happening in Australia is that brokers are dealing directly with leasing firms in Australia, while DLC has purchased its own.

Lease finance comprises roughly 40% of the Australia's equipment expenditure, according to the Australian Equipment Lessors Association.

Kirk Tsihlis, managing director of Australian equipment leasing and financing company LeaseChoice, says the effects of the credit crunch have had an impact not only on interest rates and LTVs, but also on the attitude of borrowers.

"The days of, 'Don't worry, I will put that on my mortgage' approach are definitely over," he says. "Leasing has become a more commercially astute and attractive option because it is not driven by property dynamics."

The approach Australian leasing companies take while working with brokers varies. Firms such as Finlease involve brokers as introducers in a referral model and handle the client liaising process.

"Finlease pays brokers a referral fee upfront and then works for their clients on their behalf, however, we are happy for brokers to be involved as much as they would like to be," says managing director Mark O'Donoghue. "That way, they can see the process, be mentored and learn along the way - but they're doing it in a safe portal."

On the flip side, providers such as IAC Equipment, require more involvement from brokers, says general manager Sam Lynch.

"We trust the broker to deal directly with the client. It's the broker's customer, we rely on the broker to personally speak to that customer, to receive an application, sign the contract documents and go through the whole process," he says.

Broker case study
Mike Christenson
Mortgage associate
Dominion Lending Centres Stellar Mortgage Corp
August leasing commission cheque: almost $20,000

Christenson started his brokering career with DLC in February. On his second day of work, DLC rolled out its DLC Leasing division in Alberta.

Coincidentally, Christenson has an equipment leasing background. He worked for General Motors Acceptance Corporation for about seven years and was also an equipment manager at an oilfield service company for three years immediately prior to getting into brokering.

Christenson has taken advantage of his past contacts and made them aware that he now has the ability to do equipment leasing.

"I didn't end up choosing to focus strictly on leasing," he says. "I do like mortgages, but there's some good money to be made in the leasing if you can find that right market."

August was his strong month for closing equipment leasing deals - his monthly commissions totalled almost $20,000 from leasing alone based on three deals. One loan was on a heavy-duty oilfield truck that was rigged up with a lot of backend equipment and the other two were for oilfield structures.

"I had a deal that was for equipment worth about $1.2 million that we went a long way on, and it fell apart near the end - where the commission would have been great," Christenson says. "There's stuff out there, and you definitely win some and you lose some."

Christenson pretty much balances his time on whichever end of the business - mortgages or leasing - is the most plentiful at any given point in time.

"I find that mortgages can be satisfying when you help people out," he says. "Somebody getting a home is a little more satisfying than helping a company get a piece of equipment."

He says he hasn't reached a point where working both businesses has become overwhelming. "I'm still trying to find out what works for me and if the business seems to grow enough, then I would multi-task to the best of my ability and then hire somebody to help me out."

Having the leasing option available has made Christenson's first few months of brokering a lot easier. "It worked out great for me time-wise - it's helped supplement the mortgage business for me while I try to get it going," he says. "It's a tough racket right now, especially with the situation with housing and so forth - the market's a little bit down and I came in just after the big surge. So, leasing has certainly helped pay some bills while I'm trying to get it all going."