Get yourself a Warehouse Line

A Warehouse Line enables you to “fund leases” to discount or borrow against recourse or non-recourse with specific stipulations.

Before getting into this aspect and its history, a “Warehouse Line” allows you also to pay a seller of equipment much faster than waiting for all paperwork to be complete, speeding up the process tremendously. In this tightening money situation, it gives you the ability to pay vendors half with the order, or to form a multi-lease, paying in any increments you choose. Today vendors are hungry for cash, plus also becoming even more particular in how fast they are going to be paid. This is a tremendous advantage in the street.

While some funders offer this today, including an interest only form on the money advanced, the profit comes in not only being able to attract more vendors, control the rate and margin of the transaction, but in additional profits by using the lease factor on the money advanced in the lease factor. In addition, in better control of the sale of the “master lease” and its advantages,

often a fee of 2% can be included. This is not an uncommon practice in the financial industry. Encourage more “master leases” from multiply vendors.

Not only does the “Warehouse Line” allow you to create more sales, but more income too. You are not only collecting on the increase rate in the sell, but the principal too (which is all profit in interim rent.)

Many banks and funders will issue these lines of credit based on viewing the credit of the company obtaining the “master lease” and/or viewing the approval from the company who is going to fund the transaction, rather than your own net worth or history. Of course, the better your credit, net worth, and history, the larger the line of credit, better terms, and perhaps even several warehouse lines of credit.

When you are able, have a second bank, which will help in negotiations with the first bank, and perhaps more importantly, if one bank changes the terms and conditions, you have a second backup with no business disruption.

Again, it depends on your personal and/or company’s creditworthiness as to what you may obtain. It also depends if it is a community bank or regional bank or your personal relationship, meaning your network of friends.

The idea is to start, manage it well, and with history be able to increase the line of credit.

The first pitfall is credit changes before the final “take out” transaction is completed. Rate changes can be protected, but say in collecting the “interim rent” the check bounces. The master lease takes six months, not two, or even longer. You learn there is fraud involved.

There are a long lists of other things that can go wrong.

It is best to start small, funding solid credits in advance to obtain the vendor business, learning the mechanics, and getting your feet wet. The more transactions you do, the more experience you will gain in what you overlooked and what can go wrong.

Another piece of advice is to only use the line for lessees an hour driving distance from your office. You can visit them. See what is going on. Have a better relationship and anticipate pitfalls.

You can also have a recourse line, as the credit may expire, and you are either allowed to keep the transaction in your warehouse line or have a recourse line to carry your own leases. This is

extremely dangerous in this economy. Be prepared to drive every month to the lessee to pick up a check and “hammer” it in their bank ( I have done this too many times to recount.)

Do not jump in nationwide thinking that a top credit will protect you. It is naïve. You’ll find out the hard way as staffs grow because problems grow. It may look easy, but it is definitely not.

Be very careful. Be scared.

The “Warehouse Line” has many other uses today. It has enabled small lessors to both get away from recourse lines and seek non-recourse lines, often at lower rates, plus attract more

sales either directly and/or through others lessors in different marketplaces. Before computer software accounting, lessor non-recourse was on a “deal by deal basis,” although there were larger lessors and banks who could collect a large number of leases and “lay them off” in $1 million and $5 million portfolio’s. Computer software brought this down to $500,000, and giving the lessor more sources for various collections of portfolio’s. Today minimums can be $100,000 for small ticket items.

The warehouse line has created many brokers who call themselves lessors, and even funders. In reality, if you are not full recourse, meaning if the lease defaults, you payoff the transaction ( not trade it for another or pay it down over time) you are a broker with a warehouse line. Maybe you might be collecting the personal property tax or keeping up to date on the insurance or assisting or even making the collection calls, if you have to pay it back with cash, then you are a funder. It is really your money, not someone else’s.

Most of the leasing companies today use a warehouse line to either securitize or sell portfolio’s or use them for a larger line of credit, basically another warehouse line in reality. It often is also a means to take a “deal off the street” while a search is made for the “take out.”

The accounting, operations, information required large staffs, a lot of overhead, so the players were limited, but as the computers grew fast, processed more, retained more, programs were written that controlled the accounting, accountability, and statistics of the leases. This enabled more non-recourse transactions, as well as making it economical for others to buy in smaller increments, particularly useful in the small ticket marketplace. It enable securitization of leases in smaller portfolio’s which could be bundled and re-sold again just like in real property mortgages. It also enabled, as Bill Gates originally said, a very small operation to compete with a very large operation.