Rental programs help dealers ride out the economic recession
Here is a story that I have heard far too often over the years:
"John" has been a professional water treatment dealer for eight years. Like many, he built his business from the ground up. By his own admission, he had more determination than money, so things were tight for a few years, but his business continued to grow.
Over the years, he managed to build a softener rental base — not a lot of units in service, but enough that every quarter he noticed the difference it made. John never consciously thought of developing a true rental program; he actually rarely offered it to prospects because he needed the profits from outright sales to keep things running.
Several years ago, when the general economic recession began, softener and conditioner sales started a slow, steady decline. New home developments and construction, previously a consistent source of business, came to an abrupt standstill. John's business, which had grown quite a bit over the years, started to feel the effects, which were later exacerbated by the loss of a major manufacturer in his service area. The cyclical economic times he had heard about were now up close and personal.
After reflecting on it, John realized that he was concerned, but not worried. The recurring revenue from the gradual building of his rental base over the last several years was helping him take care of his monthly fixed costs — the taxes, insurance, vehicle payments, utilities and, most important to him, the livelihoods of the people he felt responsible for. He was not only generating cash each month, but had, as a consequence, added asset value to the business.
In retrospect, John was pleased that he had invested in the long-term viability of the business by offering customers the opportunity to lease instead of purchase equipment, but wished he had taken a more strategic path in developing a true rental program that would have substantially increased the overall value of the business.
Attitudes Toward Renting
At the recent "Moving Forward Together" Water-Right/WaterCare Professional Level Dealer Network Convention, attendees of the "Building Equity With Rentals" breakout session were asked whether they had a formalized rental program in effect. A show of hands indicated that just a few did.
After digesting the material presented, the attendees were asked when would be a good time to start putting a program together. Most responded with "right now" or "fairly soon." It seemed they took the message to heart that a growing number of economists believe the paradigm has shifted from outright purchase of products and services to leasing or renting.
By modern standards, people associate buying with debt: obligations they cannot simply walk away from. A major contributing factor is that consumers today have less disposable income. Due to inflation, cost-of-living expenses are rapidly outpacing cost-of-living adjustments. Families shoulder the costs of products and services that were once considered discretionary but are now perceived to be absolutely necessary to function in society. The average household in water treatment dealers' target market demographic has a minimum of one laptop computer, three cell phones, cable television and high-speed Internet service.
Educational costs are another contributing factor to the preference for rental over purchase. According to the College Board, over the past 20 years, tuition and fees at public colleges and universities have surged almost 130%, while middle class incomes have stagnated. Some pundits say that more than half of the people who borrow funds for post-secondary education will more than likely still be repaying those loans over the full 20-year student loan period.
Starting a Rental Program
More and more people are becoming increasingly averse to taking on additional debt. Instead, they are focused on saving and reducing consumption. One might say that people are now, more than ever, pre-conditioned to rent versus own.
Consequently, the rental segment will likely continue to grow over the next several years, and there is no better time than right now to start capitalizing on it. As an old but savvy water treatment dealer once told me, "Don’t just spend money, invest it. As owners or general managers of a service business, we need to, whenever possible, create multiple flows of income. Doing so will do nothing less than make us stronger."
Some dealers might say, "I can’t afford to do it." I say, "You can’t afford not to do it." You don’t have to dive deep into the pool—go slowly. Based on your existing cash flow, determine what you can afford in order to amortize a system over the next 18 to 24 months. If you have access or channels to secure long-term business loans, then, when structured correctly, they will leave you with a positive monthly cash flow. Plus, there are depreciation and interest deductions that come into play. Some companies offer premier customers a financing program to assist them in growing the rental side of the business.
As you contemplate the prospect of building equity with rentals, here are five tips to keep in mind:
- 1. Go slowly. Do not actively promote or advertise the lease or rental of equipment if you cannot financially support the push.
- 2. Make sure you have a well-written rental contract asserting the rights of the parties involved.
- 3. Implement a credit check policy to avoid payment problems.
- 4. Consider utilizing an automated clearing house to collect payment.
- 5. Consider the life expectancy and serviceability of the equipment you place in service. The more you have to service it, the more it will cost you.