New Life on Lease

From cranes to copy machines, you can finance almost anything via the Internet, but convenience seems to matter more than cost -- for now.
Tim ReasonNovember 1, 2000

Snack pies and roasted coffee aren’t just tasty treats for Lee Rucker, the new CFO of Horizon Food Group Inc. They’re the core of his business–and the impetus for his recent foray into the world of Web-based equipment financing.

The year-old San Francisco company, formed through mergers and acquisitions involving six established food manufacturers, is hungry for capital equipment. Its newly consolidated snack pie division is planning computer system upgrades worth almost $300,000. Its Houston plant needs an extruder and sheeter, a $200,000 machine that kneads and shapes pie dough. And, thanks to a 30 percent jump in business, its coffee division finds itself in the market for a $250,000 coffee roaster.

Life is good at Horizon, but the acquisitions and expansions have left the company with “a fair amount of leverage” in senior and subordinated debt, says Rucker. The debt is tiered and scheduled to come down rapidly, but Rucker wants to preserve his bank loans for working capital needs–including more acquisitions. “I decided it made sense to try to finance some of our needs through operating leases, which are off-balance-sheet and do not affect our leverage,” he notes.

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But that decision poses other problems. “Knowing Horizon’s short history and our capital structure, I was aware that financing might be difficult to put together,” explains Rucker. And even in the eclectic world of equipment financing, heavy equipment such as extruders and coffee roasters doesn’t mix well with short-lived computers, which make lousy collateral. That meant he had to find a lender that was both understanding and flexible.

On a whim, Rucker filled out an online request for financing at Inc., a Web-based broker of business financing headquartered in Bethesda, Maryland. As a new CFO, he says, he had no existing ties to creditors, so the Web option seemed worth exploring.

“I was curious,” he says, “but I really didn’t anticipate that it would lead to a solution.”

Rucker was pleasantly surprised. Todd Harrington, a principal with’s finance team and a former banker with Chase Manhattan’s middle-market group, responded quickly and set to work finding lenders that could meet Horizon’s needs. “They have been fairly creative about finding ways to get the deal done,” says Rucker. As this article went to press, Rucker was comparing a proposal brokered by with others obtained in more traditional fashion through creditor account representatives.

Anyone looking to follow Rucker’s lead has plenty of options. There are more than 800 members of the Arlington, Virginia-based Equipment Leasing Association, ranging from new Internet “pure plays” to well-established companies, many of which are moving quickly toward a bricks-and-clicks model. The $233-billion-a-year equipment-leasing business is rewiring itself to be faster, more flexible, and more competitive than ever before. But what it isn’t doing, practitioners insist, is changing the dynamic of the relationship. Says’s Harrington, “The interaction between the banker and the client is not ‘New Economy,’ but the way we attract the client is.”

Simple Efficiency

The advent of online leasing has ushered in new ways of doing business, however. Sites such as,, LeasePoint .com, and act as neutral brokers, using the Web to automate much of the origination process; they are not lenders themselves. Customers post a single request for financing to these sites, but multiple creditors can respond–a huge time-saver for finance departments.

That’s what led Fred Socco to San Francisco­ based Lendx a year ago. Socco is the treasury manager of Houston-based Smith International Inc., a $3 billion supplier to the oil and gas industry and a company that, as Socco says, “leases everything from barges to copy machines to five-story-high air compressors.” These products are often bundled into single lease packages worth at least $500,000, adding up to a current portfolio of $115 million in noncancelable operating leases. Soliciting two or three bids for so much leased equipment poses a managerial headache, so the company decided to put all leases over $500,000 on Lendx’s auction platform. “Online leasing saves us quite a lot of time drawing up RFPs and faxing them to several companies,” says Socco.

Smith International didn’t just move its business to the Web, it dragged its bankers there as well. Socco told the company’s preferred banks that was where they’d find all of the company’s future leasing business, and they signed up. “They agreed that was an efficient way of doing it,” says Socco.

Perhaps too efficient, at least from the point of view of some lessors. Auctions aren’t limited to the banks that Smith International brought with it; other lessors can play as well. Smith’s most recent lease–$2 million for three Caterpillar tractors at the company’s Battle Mountain mining location in Nevada–was won by Citizen’s Leasing, an Atlanta-based branch of Citizen’s Bank. “That was the first I heard from them,” says Socco.

In theory, the open competition of online marketplaces should drive down financing and leasing costs. Competitive pricing is often touted as a major benefit in such fast-moving financial instrument markets as foreign exchange, where the convenience factor alone isn’t enough to outweigh CFO trepidation about doing big-money deals online (see “Portal Envy,” July).

Convenience and time savings carry more weight in the transaction-oriented leasing business, however. As long as terms of the online deals are on a par with the rest of the market, says Socco, he isn’t too worried about squeezing his creditors for lower rates. “How low can you go?” he says. Streamlined applications processes and the ability to store relevant documentation, however, are big selling points.

Big Digs, Fast Ferries

Peter Grela, CFO of Cambridge, Massachusetts-based The Modern Continental Cos., does think rates will become the focus of competition eventually, but it was the convenience factor that sold him on the leasing site run by Pure Markets. A diversified construction company, Modern Continental has projects ranging from Boston’s famous “Big Dig”–the largest civil-engineering project in the world–to construction at the Miami Airport. Among its other businesses, the company also runs high- speed ferries to East Coast destinations such as Cape Cod.

Everything from those ferries to construction cranes is financed, usually through straight debt financing, says Grela. “In any given quarter, we finance anywhere from $2 million­-$3 million to $12 million-$15 million in equipment,” he notes.

When Pure Markets contacted Modern Continental in April, says Grela, “they got our interest very quickly.” Like Smith International, Modern rolls up multiple pieces of equipment into single financing packages, each worth a minimum of $3 million. Grela’s staff put together about five deals aggregating about $30 million to test the Pure Markets site. “There is a significant time savings,” says Grela. “The work you’d do for 1 lender is done for 20 or 30.” Modern Continental has already secured about $15 million in financing through Pure Markets, he says, and another deal is awaiting documentation.

The deals have led to relationships with several new lenders. “Only one is a lender that we’ve dealt with previously,” says Grela. The rest “are institutions that have never called on us and that we wouldn’t have thought of when placing debt.”

That’s an aspect of online leasing that is attracting the attention of many lessors. Rick Remicker, president and CEO of KeyCorp Leasing, in Albany, New York, says his firm has devoted some staff members to the online channel. “We’re asking them to poke around and try to find new business for us. We don’t have a quota for it this year, but we will in 2001.”

But while Socco and Grela have both benefited from exposure to new lenders, they clearly are more appreciative of the Internet’s unique ability to streamline the RFP process.

“Competitive bidding is important,” says Grela, “but you can get that by calling around. We really use the Web site as an alternative delivery system.” Indeed, while the Internet may be faster and more efficient than traditional leasing brokers, it hasn’t changed their model much: most dot-com sites simply take a fee from the lender for brokering the deal.


But the benefits of the Web go beyond delivery. Both Pure Markets and Lendx store the details of all deals in online portfolios, a feature that Grela and Socco praise. For Modern Continental, which historically kept its financing records in paper files, that capability helps drive its efforts to become a paperless office. Grela is also pleased with the analytical tools available from Pure Markets, such as a feature that computes the internal rate of return for all bids he receives. “Otherwise,” he says, “you’d just be sitting there doing it on a calculator.”

Leasing consultant Dan Sholem says that services, in particular post-transaction, midterm-lease services, are becoming more critical. Hosting lease information on the Web will help companies, he says, “as accounting regulations become more strict regarding reporting lease obligations.” The same holds true for lease return conditions, says Sholem, which are a useful resource even outside the finance department. “Operations personnel should be very aware of the return conditions. That can save them a lot of money,” he explains.

To sell Smith International on its service, Lendx offered to host the company’s entire leasing database–including leases not completed through Lendx–online, and is currently migrating the company’s Excel-based records to its online database. That gave Socco additional justification to use the company, but left him with some concerns about being totally dependent on Lendx’s system. “The safety net, which I am trying to work on with Lendx, is that I would like to see the online database switch over to Excel in two or three clicks,” says Socco. In the meantime, he says, he plans to run his own database in parallel.

Even as they struggle to define their comfort level, all three CFOs say they will continue to use the Web. “My views have changed,” admits Horizon Food’s Rucker, who was initially skeptical about turning to the Web. Modern Continental’s Grela thinks real estate financing–which represents more than twice the debt he incurs for equipment–will be next to move online. “More lenders will participate on the sites, the rates will get more competitive, and the analytics will continue to improve,” he says. “We are in the infancy of this right now.”

Tim Reason is a staff writer at CFO.