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