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History
of Leasing
Lease financing of personal property –
especially equipment – has experienced rapid growth
in the U.S. over the past 40 years and is often
thought of as a relatively new equipment finance device
for acquiring capital. However, leasing is actually
a very ancient form of an equipment loan, dating
back to the ancient Samarian city of Ur.
Early Origins
Clay tablets show equipment finance
transactions occurred in about 2010 B.C. in the
ancient city of Ur. Priests who were the governing
bodies rented agricultural tools to farmers and
rented land; hence, the first recorded lease financing transactions.
Later, Babylonian King Hammurabi, ancient Egyptians
and the Greeks and Romans all engaged in leases
of personal property(equipment loan). Ships, chartered
from the time of the ancient Phoenicians, were actually
very pure forms of equipment loans. In fact, net
lease provisions in modern leases are known as "pay
come hell or high water" clauses because such provisions
originated in ship charter agreements.
Leasing in America
The first recorded leases of personal property
in the U.S. seem to have been leases of horses,
buggies and wagons by liverymen or livery stables
in the 1700's. Modern equipment leasing in the U.S.
had its significant beginnings in the 1870's by
financing barges, railroad cars, and railroad locomotives
under equipment trust certificates.
During the 1900's, railroad equipment finance was
commonly under an arrangement whereby a railroad
contracted with a manufacturer for the purchase
of railroad cars, with the purchase price to be
paid under a contract closely resembling a conditional
sale contract. Another form of railroad car leasing
evolved in which the lessor retained title to the
equipment at the end of the lease term. Though not
yet known as such, the first true leases and operating
leases of equipment other than ships came from transactions
where railroad lessors purchased or manufactured
railroad cars for lease to shippers under arrangements
whereby the lessor would maintain the cars and own
them at the end of the lease term.
The
Industrial age and Leasing
In the 1920's, manufacturers sought to increase
sales of their equipment, thus the evolution of
vendor leasing. Manufacturers promoted sales of
their products with installment sales contracts
that were then discounted to banks and finance companies.
Throughout the last century, various stimulus to
leasing arose, including World War II, causing manufacturers
to choose capital acquisition methods that did not
involve heavy investment in production equipment
that could not be used at the end of the war. Various
"formal" forms of leases began to evolve. Operating
leases, which refer to a wide variety of short-term
leases, were developed from the lease of equipment
that came with an operator, such as a truck with
a driver. Long-term true leases of equipment first
evolved in the late 1940's with railroad equipment.
The Leasing
Industry is Born
In 1954, U.S. Leasing Corp. became the first
company formed to engage in general equipment leasing
along the general lines on which such businesses
are conducted today. Several companies followed
suit, including Boothe Leasing Corp. (which was
acquired by the Greyhound Corp. in 1962 and is now
known as Finova Capital), Chandler Leasing (which
was acquired by Pepsi-Cola in 1967), General Electric
Credit Corp., Commercial Credit Corp. and a few
others. These companies were the forerunners of
the hundreds of equipment leasing companies in existence
today.
In the 1960s, IBM and Xerox recognized that substantial
sums could be made from the financing of their equipment.
Their leasing of computers and office equipment
was a significant contribution to leasing's growth,
since many companies were exposed to equipment leasing
for the first time when they leased such equipment.
Also, computer leasing by independent third-party
leasing companies became popular during the 1960's.
Leasing goes
Mainstream
Soon, other industries saw the opportunities
in the equipment leasing marketplace. When Congress
amended the Bank Holding Company Act, permitting
banks to form holding companies and engage in a
number of activities other than lending, banks found
themselves able to engage in equipment leasing.
Suddenly, leasing became respectable, moving from
"lending as a last resort" to a type of creative
financing of which smart companies took advantage.
Within a few years, most companies were exposed
to leasing and many began using leasing on a regular
basis to finance equipment needs. The industry has
grown ever since.
Tax law changes, accounting changes, and changes
in lease structures constantly challenge the industry
to stretch, bend and reinvent itself, continuing
its upward slope of profitability and volume. The
percentage of capital acquisition by leasing versus
other methods of financing equipment has grown every
year. In 1996, equipment leasing constituted $170
billion of the $566 billion spent in the U.S. on
capital acquisition, up from the estimated $152
billion in 1995.
Courtesy: Equipment Leasing Association |
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