Leasing companies purchase capital equipment, like airplanes or trucks, and then

Question

Leasing companies purchase capital equipment, like airplanes or trucks, and then lease the equipment to the firms that actually use them. On its face, it is hard to see why this is a wealth-creating transaction since the end users could borrow money and purchase their own equipment. The answer is that banks, due to the way they are regulated, are more willing to lend to companies with less debt. By leasing equipment, a company moves debt off its balance sheet, which makes it easier to borrow more heavily. The enhanced borrowing ability of low-debt companies makes leasing more valuable than borrowing and buying. In the fall of 2015, one such truck leasing company was having trouble making money. The company purchased over-the-road trucks for $82,000 and then leased them to various transport companies, ranging from small owner-operators to large publicly owned firms with fleets of over hundred trucks. Salespeople who negotiated the leases were paid a commission of $3,000 for every truck they leased.

Questions:

1. Why is the leasing company losing money? Explain.

2. How do we fix this situation and turn the company to a profitable one?

Explanation / Answer

1. Leasing companies lose money when they do not get the right buyers to take the equipments on lease. Truck drivers are not wealthy enough to pay for the lease and thus the amount starts piling up. Many of the drivers prefer to purchase their own equipment and dont go for lease.Thus after making heavy investment in purchasing the equipment, if the Leasing companies do not get the right buyers , they start losing money.

2. In order to fix this situation, Leasing companies should come upwith attractive leasing offers. Company should purchase the equipments in small number initially and then gradually, once the business runs successfully can raise the number of Leasing equipments. They should come up with attractive EMI options to attract more number of buyers.

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