There are a number of successful equipment leasing, or 'rent-try-buy' businesses listed on the ASX. Successful, that is, from a shareholder's perspective. As for the customers; that's a different story.
The whole industry is in the business of offering outrageously expensive financing while convincing their customers they're getting a good deal, so it's probably a little unfair to single out one of them for criticism. That said, this example from hospitality equipment provider Silver Chef (ASX code SIV) is too outrageous to let pass.
Silver Chef provides a 'Rent-Try-Buy' solution pitched at cafe and restaurant owners looking to avoid the upfront cost of kitchen equipment and the like. The lessee pays weekly rent and is given the option to purchase the equipment in one year's time.
Here's how Silver Chef presents the numbers for a $2000 transaction:
According to Silver Chef your net cost of funding is 7% for a year! Try and beat that from a bank.
It's a laughable piece of misleading mathematics. In the example here, you get $2,000 worth of kit, the weekly rent is $23.08, and the equipment can be purchased at year end for $1,300. In addition bond of $300 is required to be posted and a 'documentation fee' of $195 is charged.
To come up with its 7%, Silver Chef takes the $1,200 gross rental cost for the year, deducts 30% tax from this figure, and adds the pre-tax year-end purchase price of $1,300 to arrive at a total purchase price of $2,140. Comparing this to the $2000 pre-tax original cost of equipment, Silver Chef claims that the net cost of funding is $140, or 7%.
Lets have a look at how the numbers really work from Silver Chef's point of view:
|Lessor||Date||Equipment purchase/sale ($)||Bond ($)||Fee/rent ($)||Tax ($)||Net cash flow ($)|
(51 weekly payments)
|8-Jul-12 to 30-Jun-12||23.08||1,177.08|
An internal rate of return of 52%. The key differences are that the Silver Chef numbers don't take into account the $195 fee, the time value of the $300 bond, and the tax deducation earned by Silver Chef from the decline in value of the equipment (the lessee would be entitled to this deducation had they purchased the equipment outright).
Not bad for Silver Chef shareholders, but if you're a restaurateur you'd be better of financing your equipment from a loan shark.
Silver Chef and its ASX-listed comrades, ThinkSmart and FlexiGroup, tick a lot of boxes from a shareholder perspective. Good returns on capital, plenty of growth and seemingly undemanding stock prices. But the risk of an ACCC crackdown has to be high. How they get away with advertising like this under Australian consumer protection laws is beyond me.
12 thoughts on “Rent-Try-Buy? You're Better Off With Loan Sharks”
Incredible points. Outstanding arguments. Keep up the amazing work.
How is Thorn Group (TGA) a business which FOR is a substantial holder – any different?
Apart from having consumer (v.v. small business) customer base who they had on the drip – until ASIC caught on?
At least small business owners know that their enterprise is risky?
Looks cheap but I’m trying to understand how you can reconcile your position with this view of the industry.