Offering HP/Leasing without a finance co?

carrieb

So I work for a very small food/drink manufacturing business. Customers need specific equipment to use our product. Most buy or lease or rent their own. Which is ideal for us. We are often asked to assist, we have a few contacts so that's fine.

One of our biggest customers now wants us to buy a piece of equipment and to then facilitate a "Rent to Buy" or "Lease" or "Hire Purchase". Neither he nor the customer really know which is which. They just know that they will pay monthly and own at the end. My boss has agreed to do this. He will buy, they will pay him monthly for 3 years.

I have been tasked with creating a document. An agreement to be signed. The problem is we have no template. My boss has just told me to google... I have been doing this and am now confused! It looks like HP is only through a finance company. We are not using a finance company. Renting means you never own the product. I don't want to create something that is not correct.

This is not my area of expertise at all (as you can tell!!) but there is nobody else really.

Any ideas/experience?

pedroeibar1

carrieb wrote: »

He's terrified of insurance/being sued etc. This is not my area of expertise ...Any ideas/experience?

Why would a customer want to spread out payment over three years - that is what financial institutions are for.
You tell your boss that what he wants is a legal document, which to have any force should be drawn up by a qualified person (who would also advise him of what he is letting himself in for!).
Would he ask you to take out his appendix after a bit of research on Google?

carrieb

They want to buy it through us as he will get it at a cheaper price due to his connections. Apparently.

I know, believe me, I know!!

Mrs OBumble

Your boss needs proper advice from his lawyer and his accountant.

Some things to think about:

Does he even have a reseller agreementvwith the equipment supplier? Possibly you will be breeching your contract with them if you do ithis wrongly.

Will your current insurance cover the equipment?

What happens if the customer defaults on payments?

Big Nasty

pedroeibar1 wrote: »

Why would a customer want to spread out payment over three years - that is what financial institutions are for.
You tell your boss that what he wants is a legal document, which to have any force should be drawn up by a qualified person (who would also advise him of what he is letting himself in for!).
Would he ask you to take out his appendix after a bit of research on Google?

It's fairly regular within the hospitality sector, especially with barista coffee machines that can cost €12k+. Supplier buys unit, customer pays for unit over an agreed period of time. It's a win-win for both parties as the customer doesn't have to pay out a large sum for the machine and the supplier is guaranteed continued purchase of their product for the same period.

PARlance

carrieb wrote: »

They want to buy it through us as he will get it at a cheaper price due to his connections. Apparently.

I know, believe me, I know!!

That makes a little more sense but your boss has still committed to a fairly stupid understanding.

The least messy option is that you buy and it and sell it straight away to the customer. They enter a payment plan with you over X months. They'll own it but still owe you the money. They'll have to look after service and repairs but your company runs the risk on them defaulting.

pedroeibar1

carrieb wrote: »

They want to buy it through us as he will get it at a cheaper price due to his connections. Apparently.!

Actually he could be getting it free if you draw up the agreement. (Various legal reasons.)
Giving legal advice and supporting an illegal activity are against the Forum's charter BTW. You've been told what to do, go do it.

pedroeibar1

Big Nasty wrote: »

It's fairly regular within the hospitality sector, especially with barista coffee machines that can cost €12k+. Supplier buys unit, customer pays for unit over an agreed period of time. It's a win-win for both parties as the customer doesn't have to pay out a large sum for the machine and the supplier is guaranteed continued purchase of their product for the same period.

Of course it is done in the hospitality sector, but not by the manufacturer. The big ones have a finance arm (like the auto manufacturers) or have a link with a finance house.

carrieb

Thanks for the advice guys. I think I will get him to call somebody in a similar company to find out if they do this and how. I am in way over my head here.

antoinolachtnai

The problem isn't the legal agreement problem really. There is a reason you don't see this precedent often; it's because it's a very bad idea. If you continue to scour the recesses of Google, you will find a precedent somewhere for an agreement. It might be a good one or a bad ones. Even a retention of title clause on the invoice and a written statement that the terms are 36 payments over 36 months might be adequate (though then again it might not be) from a legal point of view. I don't know if it really matters that much what you write in the agreement as it's not as if you're likely to ever end up in Court over this anyway. (This is a very cavalier attitude to take, I know, but the reality is that if you find later this guy can't or won't pay, and you can't seize your machine, you are just going to lose your investment.)

The real problem is that you are getting into a world that (in my humble opinion) you and your boss should simply not be in. You are a small food business and unless you are extraordinarily exceptional, you have a very tight cashflow. Now you are proposing to commit a chunk of your very narrow balance sheet to supporting a 'big' customer. ('Balance sheet' is a fancy word financiers use; in your case what it essentially means is 'the life savings of the owner, which are tied up in his business'. The problem is, that your big customer is not really creditworthy. Obviously I do not know who your employer is and I do not know who your customer is. But I can tell that this customer is not creditworthy. I know this because they cannot get finance from any of the following:

- the bank where they lodge their cash and credit card receipts
- a finance company
- their own directors or shareholders
- the distributor or manufacturer of the piece of equipment
- the VAT man (not a legitimate source of finance, but no less popular for that)

I ask myself why in this era of cheap money, with the ECB throwing money at institutions, none of these people have been able to find it in their hearts or balance sheets to throw a few bob to this customer of yours. I feel safe deducting that these organisations feel that this business is at significant risk of not making the payments on a credit arrangement in full and on time. These organisations all have decades or even centuries of experience in assessing credit risk and their views should carry weight in your boss's mind.

Your boss is prepared to be what financiers call 'the lender of last resort' for this customer. That is a risky thing to do, but his business decision. I think he needs to make sure that he is properly paid for providing this facility. Finance is like any other product. You have to charge an appropriate price for it. If you don't, you will go out of business. Especially if this is a large customer.

Let me tell you what OK businesses are paying for short term asset-backed finance. I am talking about businesses that can pay their bills. They are paying 16 percent to invoice discounters. It is this high because of the risk involved and because of the administration involved.

Your uncreditworthy customer needs to be paying an even higher rate because their default risk is higher. Say 25 percent, but really if it can't be paid back, then it might not make sense to make the loan at any rate. (Increasing the rate obviously makes full on time payment less likely, not more likely.)

Anyway, let's say 25 percent. At a rough calculation, this would mean that the total payments for this machine, spread out over three years would need to amount to 43 percent more than the cash price for the machine. You would need to factor this into your price.

That sounds like a lot. But really it is the minimum your boss needs to get for this to be any sort of business deal for him. Now maybe instead of charging this premium on the price, he can get back that extra 43 percent some other way other than loading it onto the price of the machine, for example by charging extra for the food products. This is fine, if the customer agrees to it up front and your boss actually gets paid on time for the food products.

There are practicalities too of running an equipment financing business. I would humbly suggest that the practicalities are more important than the legal language. Some of the practicalities are: who is going to administer the whole thing (answer to this question, apparently is you, and obviously you are not experienced in the area); if customer doesn't pay, how long you will wait before you will you seize the machine; how you will actually seize the machine; who will seize the machine on your behalf; what will you do if your customer stops buying or paying for other products you supply while the agreement continues; what you would do with the bashed-up second-hand machine after you have seized it or gotten it back from the sheriff, so as to recover your value.

If you really have to do this to keep him going or to get him out of a lurch, I would suggest sourcing an old machine from another customer and giving him that, getting as big a deposit as you can and getting the machine paid for over 12 or 16 weeks rather than over 3 years.