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Buy a franchise to get into the leasing business?

Winmark Corp (formerly Grow Biz), franchisor of the retail stores Play It Again Sports, Once Upon a Child, Plato’s Closet and Music Go Round, has a new franchise concept called Wirth Business Credit. It’s mission is to help small businesses lease equipment.

Leasing can have many advantages for a small business owner: preservation of capital and credit for other expenses and investment in growth, simpler bookkeeping and tax reporting, tax advantages, improves financial ratios, etc.

Why would someone choose to lease from Wirth Business Credit over any of the other many leasing companies? I don’t know, unless their rates are cheaper and terms are more attractive. However, I doubt whether the tight structural constaints of a franchise is the best means to compete in a business where most sales comes down to price and, to a somewhat lesser extent, customer service.

Wirth charges around 9 percent to 14 percent today compared to a bank prime-lending rate of 8.25 percent, Morgan said. Winmark and its franchise owners earn a profit by building fees into the interest rate, much like points that are added to a home mortgage loan…..

Wirth President Mark Hooley said the company stands out from rivals because of its local presence, its automated leasing system that provides approvals in four hours or less, and the ability to finance up to 100 percent of equipment value…..

Wirth franchise owners pay an average of $60,000 to do business in a certain geographic area, including franchise, computer and marketing fees. In exchange, the company provides the brand, the business model, cash for leases, training, marketing and the collection of overdue leases.

I especially agree with the final comment in the article:

“Financing can be complicated and challenging,” Faras said. “But my part of the business is really about sales. You have to already understand sales.”

It often comes down to sales in a franchised or startup business.

About Ryan Knoll

Attorney and advisor with an interest in franchising. Feel free to email me comments and questions on the "Contact Us" page.

4 comments

  1. For applicants w/good credit, there are options and the applicants can shop for price. For those w/bad credit, the interest rate is usually not negotiable. In either case, it is the lender’s ability to quickly close the deal.

    For those not familiar with the topic, it should be pointed out that in this context, “lease” is often really the same as a purchase money loan: if you want to buy a business for $100K, BigBank will loan you $75K on a 60 month term–at the end of 60 months you own the assets. Alternatively, LeaseCorp will pay $75K for the assets and “lease” them to you on a 60 month term–at the end of 60 months there is a buy-out (usually 10%)and then you own the assets. I am simplifying a bit, but that’s the general concept.

    Remember that when they tell you that there is no interest rate on the lease, that may be technically true but there is an imputed rate of interest and you can caluclate it in a minute using an HP pocket calculator.

    Also, in a “true” lease the structure is such that a portion of the monthly payment is sales tax on the principal balance and that what buy-out option you choose may affect the tax deductibility. This is WAY out of my area, but as I understand it if your buy-out is 10% you are normally OK on the tax-deductibility of your monthly payments, but if the buy-out is $1 the “lease” may be deemed a purchase-money loan and therefore the assets under “lease” would be capitalized and then depreciated per IRC schedule. But ask your CPA about that.

    Another issue is if you sell your business before the lease term is up. Some lessors will make it easy for your purchaser, and that can be a major plus.

    Remember that most lenders (banks or leasing companies) are savvy and from a practical matter the off-balance-sheet advantages of a lease over a loan (viz financial ratios) are not normally an issue. Also, if you sign as a corporate entity– beware that you will usually have to sign a personal guaranty and that you can’t simply transfer the debt (loan or lease) by having your purchaser do a Stock Purchase Agreement instead of an Asset Purchase Agreement–lenders are not idiots and normally there is a “change of control” clause triggered if you are no longer the controlling shareholder.

  2. semi-dumb question here —- what’s the difference bewteen commercial “leasing” and “renting”?

  3. Good question. The terms are thrown around, and in the commercial context people usually don’t say “rent” unless they are referring to real property. “Lease” can either be a true lease (basically, renting with an option to buy) or a disguised purchase money loan. So, the “lease” can in reality include not only the value of the equipment but the value of the business (including goodwill, leasehold improvements, etc).

    Best addressed to your CPA, but I’ll give it a shot based on my imperfect understanding of the tax code: If you rent, the rent payments are deductible as a business expense. You don’t amortize, and you don’t have any right to purchase. If you “lease” on a “true lease” your deduction is the same and at the end you normally would have a buy-out of 10% of the initial fair market value. If you “lease” on a lease with a token ($1) buy-out, the tax auditors will say that this is really a purchase money loan; therefore the equipment cost is capitalized and depreciated on a multi-year schedule. There are several ways of setting up a depreciation schedule. The easiest to understand is a straight-line depreciation with zero residual value. Have the CPA explain this to you, and then you have the conceptual basis for understanding the variants.

    If anyone on the discussion board is more up to speed on this, please post a reply.

  4. Looking for a Loan or a lease to purchase a franchise need $25000.- what leasing companies do you know of that can arrange such a deal? Remember my credit is not to good! Any help you can provide would be greatly appreciated! I’ve been looking for several months now unfortunately i’ve been unsuccessful. Thanks Dale McCoy at mccoyenterprises@zoominternet.net

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