Building an in-house leasing company

Not all profit streams require major investments

Dealers today are looking for new profit streams without having to make major capital investments.

With current supply shortages, many dealers are being forced to rethink their businesses and figure out new ways to control vehicle lifecycles. To that end, many are reconsidering the in-house leasing concept.

If done right, this business model could provide dealers with new profit streams, an enhanced ability to service customers and, perhaps most importantly, the ability to control their vehicle pipeline.

Here’s what to consider when developing an in-house leasing company:

Executive sponsorship: You’ll need 100 per cent “buy-in” at all levels, otherwise this won’t work. There needs to be clear direction to the F&I team that when getting customers approved for leases, there is an order of operation that must be followed (first: OEM lenders; second: in-house leasing company; third: banks).

F&I managers cannot have the autonomy to choose, as they’ll always select the lender that offers the highest reserves and allows them to earn the most amount of commissions.

People/staffing is by far the biggest make-or-break consideration. You need trustworthy people running and working in the following departments (not “Car Guys”).

To that end, it is critical that the in-house leasing company offers competitive programs that will attract F&I managers and won’t result in a significant decrease in earning potential, otherwise the company will never get off the ground. Any fragmentation to upper level management buy-in will always lead to failure.

Capital: You’ll need both a short term and long-term funding plan. In the short term you need to answer questions about cost of funds, availability of capital, floor plan requirements, credit approval process. You’ll have to decide now whether seed capital is required to get this project off the ground. Your long-term plan relates to your securitization strategy. Which LifeCo will you be working with and what are their requirements?

Financial/business plan: Define the opportunity. Are you talking about 200 on-road units, or 10,000? If the opportunity is small, it might be best to simply partner with an established leasing company and collect a referral fee (easier and less risk).

For the most part, you won’t be able to compete with subvented rates in the new car market. In this category, you will only attract subprime customers which come with other risk factors.

These customers will not generally be long term customers and therefore don’t offer long term customer life cycle value. At best, you would attract five per cent of total new car sales to your in-house leasing company. 95 per cent will go to OEM lenders.

In the used car market, your F&I managers will choose to work with you if, a) your executive team mandates it, and b) your reserve program is competitive. Otherwise, they will always chase the money and what will line their pockets best.

How to drive the behaviour of the F&I team: Refine the F&I payment plans to motivate the shift to in-house (i.e. everything that isn’t subvented needs to go to the in-house leasing company, so compensate them accordingly). You will need proper leadership in the leasing company. This person needs to be independent of the dealership as they will ultimately need to be accountable for the credit approval process.

Your credit approval process needs to be tight and solid. No loopholes. Completely independent from the dealerships. Where mediation is needed, management must always side with the decision of the in-house leasing company or it will always face the risk of nonpayment.

Risk management: Your risk mitigation strategy starts and ends with an independent and transparent credit policy—it needs to be “fair but firm.” You will need to stress the importance of having a separate and strong leadership in this leasing company.

Your leader cannot be someone related to the dealership. Independence is key. This person must have a strong banking and finance background. There cannot be a vested interest or connection by the leasing company and the dealerships. They must be completely independent and run by a finance professional, not an automotive person. At the end of the day, a leasing company will have different metrics and KPIs based on risk, so hire a leader who truly understands this and is willing to develop a long-term strategy around this idea.

Benefit of an In-House Leasing Company

There are both financial and intrinsic benefits to starting a leasing company:

Financial benefit: In the long run, if you have enough on-road units and a pipeline that replenishes itself, you can make money. However, this won’t happen in years one to three. If you’re lucky, this could happen in year five or so. The key to winning in the leasing game is having a long view.

Intrinsic benefit: You’ll be able to control the customer and own the lifecycle of the vehicle. Your strategy should be to push three-year leases. If you assume a car lasts nine years before it is scrapped, you can make money on it three times over. Sounds good to me!

Structure of Leases (Open vs Closed End Lease)

Open end: Customer guarantees the residual value of the vehicle. They can either choose to buy the car at the end of the lease, or are responsible for the balloon payment at the end. Customer takes on all the risk.

Closed end: No guarantee of residual value in these types of leases. The leasing company is responsible for any decreases in residual values at the end of the lease.

From a risk mitigation perspective, in-house leasing companies should only be offering open ended leases. Moreover, when dealing with commercial leases, always assume a residual value of $1. The least amount of exposure you have, the better.


This is by far the biggest make-or-break consideration. You need trustworthy people running and working in the following departments (not “Car Guys”):

Credit approval: Based on FICO Score or Beacon Score (Equifax, Credit Bureau). The Credit approval needs to be on a sliding scale, not a hit-or-miss exercise, otherwise your business will never get off the ground.

Collections: You will need people making collection calls and dealing with repossessions. This is the reality of this business, so you need a process to deal with this aspect too.

Relationships with lenders: You’ll need to build relationships with banks and a securitization partner.  This is your major cash flow injection every month. Without these key relationships, you won’t be able to stay cash positive and grow your business.

Assessing and updating residual values: Do this every month using Canadian Black Book or American Lending Guide. You need an accurate matrix to refer to in order to build proper leases and mitigate your risk exposure.

Defining your interest rate spread: Your opening APR needs to incorporate the following: Cost of funds + 2% + 300 bps or 400 bps to cover risk factors. Therefore, assuming your cost of funds is three per cent, your opening APR needs to be 7.99% or 8% (3% + 2% +300pbs). 

You can clearly see how difficult it is to compete against OEM lenders who are currently offering 4.99% on mainline brands. This means your customer base is really anyone who doesn’t care about prices (i.e. high net worth individuals who care more about the car they drive rather than the rate) or those individuals who don’t qualify elsewhere.

Of the two per cent spread you’ve built into your model, one per cent should be used to cover S,G&A expenses and one per cent to accrue for future losses (Reserve or Packs). Net-to-sales figures for an established leasing company runs between one to three per cent net-to-sales. Much of this comes from admin fees charged deals, excess KM fees and other sources of income

Financing covenants:

A leasing company is a leverage-based business. You will need to have access to at least 8:1 Debt-to-Equity to run this type of company. When negotiating with your bank, it is recommended that you push for 10:1 to be safe. This is a very capital intensive and leveraged type of business model, so plan ahead to ensure you can stay afloat.

A well-run leasing company can generate a tremendous amount of cash and help you funnel used vehicles to your dealerships. While risky, benefits can be huge. Strategically plan and consider the items mentioned above. Staff the project appropriately and you will see a successful business emerge in the long run.

Lease well!

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