by Frank Cannata on Tuesday, June 23, 2009
With so many of our readers experiencing difficulty with leasing providers and approvals, we thought it would be a good idea to talk to the people in charge. We singled out Dave Pohlman - Vice President of Great America. He was more than happy to share his time with us. It is important for everyone to understand that with a better appreciation of the problems that leasing companies face, we can all be more aware of what can be done to alleviate the pressures and challenges that we all must contend.
CR: With all the turmoil of the economy and banks on the front burner of the news every day, how is your company coping? As a follow-up, how is your business compared to same period last year?
Pohlman: We are coping very well, and in terms of our business we are experiencing a 25 percent growth Y-O-Y. A good portion of that is coming from how we capitalized ourselves, and through strategic positioning. Some of that growth came from competitors who gave us an opportunity to pick up some of the new business we have enjoyed. We have been quite selective with the new dealers that have expressed an interest in forming a relationship. We are looking for a long term association, not just to be one more stop on the way. I cannot say it strongly enough - we want to find good long term partners. To some degree, we are balancing that right now. But I am also fearful that our service would suffer if the dealers were not a good long term fit.
This is a time for opportunity management. We have the opportunity, and if we do it right, we will win a significant share of the market. From a delinquency perspective, we are up versus last year, and our bad debt is up as well. When I compare our experience to what others are experiencing, we are not radically different than the way most leasing companies run in normal times. A good leasing company has to maintain a level of discipline as they move through these tough economic times.
CR: In looking at the current market, what percentag of credit applications being submitted are approved? We want you to look at the business in a very broad way rather than situation to situation and dealer to dealer.
Pohlman: The average approval rate, in normal times, is in the 75 –80 percent range. These days the number is closer to 70– 75 percent, depending on the month. It is more isolated in certain industries and markets, so the same rules and experiences do not apply. We take an approach that is somewhat different. No matter whom it is, whether it is auto, mortgage, construction or real estate, we recognize there are good players in those markets that will thrive in the long term. You need to do a good job of identifying who will survive and who will not. Our delinquency rate will rise because it represents a risk. It is easy to say we will not underwrite that type of business. We have to think of our dealer partners that give us business, month in month out. Many of them are doing business that falls within those troubled spaces. A dealer looking to merely place a lease in a troubled market segment, who is not a consistent customer – we will turn that type of deal down. For the good partners, we will work with them. We are collaborating more on those tougher credit situations where we get a partial guarantee from the dealer – paying a portion or so much up front. It is a way to manage the risk for both us.
In certain markets, we encourage dealers to place a used piece of equipment at a minimal amount where we will bill and collect for them. That gives us a chance to build a relationship and help the dealer through the tough times. The current climate does not really allow for us to think in a black and white way and be more creative. Instead of renting the used box, put it on a lease so that you have a contract with the customer – in the end you get your money over time. In this way, we are essentially sharing. We will bill the customer full boat – and rebate the money to the dealer and take the risk.
CR: Generally speaking, how much have rates increased (on average), and when do you see this changing? If you think it will remain as it is today,please give us your reasons for saying so?
Pohlman: Rates have gone up, and it has been a function of increasing bad debt reserve because that is higher. In addition, what is driving some of this increase is the risk spread that banks are adding to term lending on our overall cost of funds. I do not see a lot of hope for rate reduction in the future.
What I am going to say is going to sound a little bit odd. As interest rates increase, you will see a lower leasing rate – the result of the impact of the true rate. As treasury rates lower, the actual cost to borrow becomes greater due to a higher delinquency and bad debt. What you experience is an all-inclusive rate around lending. You can see a scenario where the Treasury increases rates because of a recovery and
actually end up seeing lower leasing rates because you will actually see a lower cost of funds. The credit
risk is what drives the leasing rates.
CR: Unrest in the capital markets shakes the very foundation of business. In our business, the lease is a critical part of the equation. In your opinion, how are dealers faring with this kind of challenge?
Pohlman: I think it is the greatest or primary source of a challenge for copier dealers. The lending market is so unsure today that the credit market has seized up, and it is has impacted business activity. What we have today are businesses struggling to borrow in order to expand. It is probably the single largest contributor to the difficulty they are facing.
We see the dealer’s customers being in the cash preservation mode and trying to cut costs. Often times, it is reflected in their decision making process. They are saying it is not a time to upgrade, and are very unwilling to make a decision that they would normally make in the course of doing business.
What I would encourage dealers to do is to focus on the new technology, and with that they can deliver increased productivity and a reduction in costs. It is very difficult to get end users to engage in the discussion – it is a sign of the environment that many businesses are in. Some dealers are doing very well and finding ways to get customers engaged in a creative way. The hurdle to upgrading is more money – perhaps the answer is managed print to help reduce the costs. If you can get the attention of the customer to listen to that kind of presentation, there is an immense chance of success. We are seeing quite a few of our dealer customers engaging in that approach. From where we stand, that type of message is resonating very well. You have to back it up, but it gets the customer’s attention, and the opportunity is real.
CR: Has your company taken any measures such as restructuring, eliminating certain positions, or in
any way reducing your support to the dealer or to the end user?
Pohlman: We have been in a strong hiring mode – if anything, we are suffering from a lack of ability to hire enough people to meet the increase in our business. We are adding new relationships, and we have to evaluate if those additions in any way diminish our service capability. In other words, we have to maintain a delicate balance. We need to find a way to grow, but not fail in delivering the kind of support that has been the hallmark of the Great America experience. That has been our biggest challenge. It is caused by the growth coming very swiftly. There is a window of opportunity, and it is not in adding quantity. What we want to add is a quality that is consistent with what we have enjoyed in the past. We look at those people who will be a good fit for us, and who will make the contribution that we expect from all of our employees. We have options, because there are many people out there who are disenchanted.
We want to make sure that person understands how we prefer to do business, support our customers, and contribute to the success of our company and our customers. When we bring dealers into the fold, we want to ensure that they are totally comfortable with Great America. If they are committed to a long term relationship, they will have a great experience with us.
CR: How do you believe dealers should respond to the current crisis? Is it changing the profile of the customer to represent a more credit-worthy risk? If so, how will that affect the business, and to what degree? Does it mean fewer customers or fewer sales – what is your opinion?
Pohlman: I think that is the reality of where we are today. If you have a concentration in real estate, mortgage companies, auto dealerships, construction, and in municipal government– those are markets that are going to continue to be challenged. For how long, it is hard to say - but I have to believe it will be at least for the next 12 – 18 months. If you have a lot of concentration in those areas, you had best look elsewhere. If you are balanced, you do not need to do anything - just keep doing what you are doing, though looking at less impacted markets is a worthwhile venture.
CR: Has the leasing approval process changed? By that, we mean – does it take longer, do you need more information on the customer, or are there any additional requirements?
Pohlman: In some of those markets you are requiring more information, because you are trying to determine who will survive and cannot get enough information to make a decision. From our perspective, there has not been much of a change. The marginal credit is getting scrutinized more than it used to. For those customers we have had a good relationship with - our booked to submission versus what is actually booked - there is a little bit of deterioration. That puts us in a difficult position. We are finding ourselves having to look at those difficult transactions, trying to figure out the best way to manage them. When you are growing at a great rate and you are resource-strained, those kinds of things have to become discussions that you would not have had in the past. The result is more time to process the lease, because you are just trying to find a way to make an informed and favorable financial decision.
CR: What is your prognosis for 2009? Do you see the business as flat, or will it decline to any appreciable degree and if so, to what extent?
Pohlman: My opinion is that the office equipment dealer business will be flat. Candidly, those that really fall into the area of being a traditional box mover will be down. Those dealers that are already engaged or moving into print management will move up, but more likely be closer to flat.
CR: As a financial institution, what is your greatest challenge, and how are you dealing with it?
Pohlman: There are contrary elements that can sometimes throw logic right out the window. For example, to expand, we need to bring dealer partners into the fold. But the need is for us to be selective, and sometimes it can even be addition by subtraction. We are spending a lot of time with this, trying to find a good balance and maintain a consistent performance. We have to be very careful on the bad debt side of things. We know we are going to have some upticks, but we have to manage it well – we look upon it as a window of opportunity. We expect to come out of it a stronger player than ever before. Right now, we are making tremendous investments in our bundle billing capabilities. Based on what we can see, others are not making these same investments. If we are correct, we will be stronger and better able to service our customers after the storm.
CR: In your business planning, how are you anticipating the business in 2010? Are you optimistic, pessimistic, or just unsure at this time? And if so, why?
Pohlman: In our business plan, office equipment is rapidly becoming a larger part of the business. Last month we were at 70 percent. This is up from the 50 percent we were at three years ago. We are very bullish on the space. In some cases, they have been disenfranchised by the company they were doing business with. That continues to represent an opportunity for us. We continue to see the quality dealer in managed print services as a good fit for us. We see double digit growth for next year as well.
CR: Thanks you for being so gracious with your time and responses. You certainly taught me a great deal about the difficulties you face, and answered the questions in a very candid manner. I certainly appreciate that, and I know our audience will appreciate it as well.
Reprinted with permission from Marketing Research Consultants Inc. LLC, P.O. Box 180 Hamburg, New Jersey 07419. email: firstname.lastname@example.org. Editor, Frank G. Cannata. June 5, 2009