Progressive Rentals January-February 2005

Idle Thinking About Idle Inventory by Ed Winn III

The Champion of Entrepreneurs: An APROfile of Trooper Earle by Kristen Card

The Future of Plastic Transactions by Julie Sherrier

Security Interests, RTO Agreements and Consumer Bankruptcies by Ed Winn III

Idle Thinking About Idle Inventory

by Ed Winn III

There are those who think that all people and all issues can be divided into two camps and there are those who don’t. How rental dealers view used idle inventory is one such test of the “everything into two camps” construct. The thesis is that there are those rental dealers who love used idle inventory. I am postulating that this audience makes up 20 percent for the sake of argument and in keeping with the principle that everything divides 80 percent to 20 percent. And there are those dealers who loathe used idle inventory (our 80 percent). Is It Clutter?

Used merchandise is, after all, used. Sometimes it is all used up—like the baby bear’s porridge. It never has the shine and smell of something just-out-ofthe- box new. It has been picked up at least once. The pickup may have left a bad taste in the dealer’s mouth in and of itself. The used product may be dirty or broken or both. Somebody is going to have to clean it up and maybe fix it before it is worth anything again. It may have to be fumigated, repainted, rewired or sewn back together. That makes a lot of work for somebody and is so much less fun than popping open the box of something brand new. Then that used, reworked thing is going to have to be rerented if it is going to have any real value to the rental company.

That means steering a customer away from the nice, new, easy-torent stuff over toward the bargain bin, not at all where the dealer’s heart lies, and it means making excuses for the stuff on the way over and, finally, only half-heartedly trying the make the deal. This dealer, after all, hates the used stuff because of all the trouble it brings with it to the store and it is hard to feign a seller’s enthusiasm for something that is secretly despised. The result of this attitude is that the used stuff doesn’t move. It hangs around in the a dimly lighted corner of the showroom and, over time, the pile of used stuff grows, but the store doesn’t and the BOR doesn’t and the revenues don’t because the dealers who hate the used stuff do not understand what they really have on their hands.

Or Is It Cash? The other 20-percent side knows, though. These dealers understand how to read a store’s profit-andloss statement. They understand how depreciation works and how to boost store revenues and profits by falling in love with their used idle inventory and by treating it with the respect that a revenue-generating asset deserves. Now these dealers do not like picking stuff up any better than anyone else. In a perfect world, all customers would all pay on time and keep all of their stuff until they owned it (and then come back in for more). But these dealers live in the all-too-real RTO world where stuff comes back all the time. It is called the rental business, after all. But these dealers view picking up used merchandise as an opportunity in the making rather than as a burden. First of all, they know the details of what is being returned. Let’s suppose that it’s a 36-inch flat screen that cost the company $600 brand new.

Let’s suppose further that it has been out more than once for a total of six months and let’s also suppose, for internal bookkeeping purposes, the company is using 18 months straight-line depreciation on its rental property. That means that the company is taking $33 per month as an expense for every month that it owns that TV. After six months, the value of that TV on the company’s books is $400. Some dealers who don’t know this in their souls only see a dirty, scratched-up TV coming back in to clutter up the showroom. This TV shows up badly next to the wall of brand new sets. Too many dealers figure that nobody is going to want it and don’t bother trying to do anything with it.

One Dealer's Trash is Another Dealer's Treasure The enlightened dealer, however, sees this previously loved unit for the treasure that it is. This dealer knows that for $50 or so, the cabinet can be repaired and polished and made to look as good as new. He thinks that somebody will want this TV and knows that he can make a really good deal on it. He knows better than to try to rent it out for another 18 months at $100 per month like the brand new ones. That won’t work. He could get it back out on a 12-month agreement, maybe, or maybe he could sell it for cash for, say, $600 or even a quick $500, if he showcases the product and lets people know that he has some very good deals on used merchandise. Beside a new set with a cash price of $900 or $1,000, this set at half that price should fly off of the shelf. Then, the dealer has moved a unit and made room for another new one on the floor. He has made some lucky customer very happy with a really good deal and made the company some money.

The dealer is selling that TV at his original wholesale cost and is still making a 33 percent gross margin overall on the unit. That is a great deal for the customer and a healthy return for the dealer. Now, he did not maximize the rental revenue potential of that unit and he knows it and doesn’t care. Instead, he sold it.He sold it cheap and he sold it quick. The company only grossed $1,100 on the TV, not the full $1,800 he would have gotten if the set had been rented for the full 18 months, but he moved the unit in seven months instead of 18. There is interest being paid during all of those months and there are transaction costs associated with each rental and so while the company may have made $700 less than the full potential on the set, there are also savings that the company enjoyed by making a quick disposition.

Out With the Old, In With the New It is common wisdom in the industry that new stuff sticks better than used. So, over time, if the used stuff is cycled through the system with vigor and focus, there will be a higher mix of new items on the floor. That will mean a higher keep rate. That, in turn, will mean happier customers, fewer pickups, fewer transactions, lower transaction costs and a generally happier, more updated store. Some rental dealers will say, “that’s not enough.” Some rental dealers want those VCRs that generate $5,000 over years that The Wall Street Journal took such offense to several years ago. There are doubtless dealers out there who dream of having a store with only fully depreciated merchandise lying around. To them, every real dollar is profit, all $20,000 per month of them. It is a way to run the business, but it is not the way to build big stores and grow big revenues. The secret to big stores is to turn rental inventory. And big stores are fun places to own, work in and shop in.

There is, in the first place,more new stuff on the floor, because the rental inventory keeps turning. If rental dealers had really good deals on used merchandise, first of all, and then made a point of telling people about it, they would move more of it. Some stores have policies of never having a rental term less than 12 months. Others won’t rent for less than six months.Why? If a unit has been depreciated down to $200, why not sell it for cash for $250 or rent it for three months and make $300 and get rid of it and turn around and buy a new one? If the industry really wants to expand its customer base, it needs to market to one its real strengths—solid, functional, lightly used goods at bargain basement prices. If the industry got serious about moving used stuff, it could bring more customers through the doors. Customers who would never do RTO might well come in to pick up a bargain on some used electronics. But it will not happen, alas, as long as too many rental dealers hate the stuff and only suffer it being in the store at all, much less sing its praises to the public. Once these dealers learn to embrace their used idle, as some have, they can learn how to move it.

They can grow bigger stores, generate more revenue, encounter more customers, and have more fun. Here’s hoping that in this New Year, some daring dealers will give it a try.

The Champion of Entrepreneurs: An APROfile of Trooper Earle

by Kristen Card

Trooper Earle is the first to confess that he’s a workaholic. Sure, he’s a huge University of Virginia Cavaliers fan. Of course, he speaks of his wife and daughters with natural affection. But truth be told, Earle is essentially immersed in his vocation of growing a future rent-to-own powerhouse by helping longtime industry managers become successful store owners.,“I enjoy what I do and have a passion for it,” Earle says. “My primary income now comes from taking care of other people, which is really rewarding for me. It’s great to wake up every day and know I’m helping people go from being employees to owning their own business, controlling their own lives. I feel really good about helping people get into a situation where they can call their own shots.”.

Earle, a career RTO man, has been calling his own shots for several years as president and CEO of Premier Rental-Purchase (www.premierrents.net). But, he says, he’s never been more satisfied professionally than he has been during the past three years. He sold all his own stores and began to lead Premier down a new and different path—a road with a little less space for the industry big boys and a lot more room for the little guys of rent-to-own.,Trooper Earle is a busy guy— and it seems he always has been. Earle was born a Virginian, the last of five children in a military family. Though they moved frequently during his younger years, his family returned to Virginia and settled in Charlottesville, where Trooper grew up, a boy forever on the go.He played a wide variety of sports, including football, basketball and tennis. At 12, he held a state swimming record.

Once he reached high school, Earle’s entrepreneurial streak emerged. He ran a lawn service and developed a successful disc jockey business. He earned his bachelor of arts degree at the University of Virginia and, following graduation, spent time out in California working as a bartender and considering his next adventure. The RTO adventure begins He returned home to Virginia, where his next adventure— RTO—was waiting. Earle’s brother, Chip, knew a ColorTyme dealer who wanted to incorporate furniture independently into his rent-to-own offerings and needed someone to oversee operations. Chip volunteered his career-less kid brother, Trooper. Within weeks, ColorTyme announced it was going to begin offering furniture as well and Earle was assigned to a store in Harrisonburg, VA, that was grappling with about 50 percent pastdue customers.

Within a couple of months, Earle’s store was No. 1 among the owner’s three operations; eventually, Earle ran all three of the dealer’s stores. In 1985, a couple of his fellow ColorTyme-rs asked Earle whether he might consider going into a partnership with them to own their own stores. Earle agreed and became 22 percent owner of what eventually became five ColorTyme stores throughout Virginia and Maryland. Yet, when the partnership began to dissolve several years later, Earle saw it as an opportunity. “I went to the bank and told them, ‘you may not know me, but I am the one who is putting the money in the bank, which enables my partners to write you the check each month.’ I wanted to buy out my partners and even though I didn’t have much net worth at the time, I was the guy who could best protect their investment and see to it that they got their money paid back. So they said, ‘Sure, do it,’ and gave me the funding,” says Earle.

Hitting the fast-track “I became 100 percent owner of all five stores March 1, 1991, and we went on a tear. I went from being a junior partner with only 22 percent of five stores on February 28 to becoming ColorTyme’s third-largest dealer nationwide with 100 percent of 16 stores by November. In seven months, I pulled together another four financial deals to acquire 11 more ColorTyme stores. It was during this period I realized borrowing money wasn’t that difficult if I could show banks a solid financial and operational plan and how their investment would be safe and they would get paid back.” That skyrocketing success lasted a couple of years, but Earle began to get restless. He sold some stores back to the company, consolidated others and ended up leaving ColorTyme owning and operating just five. “What I really liked about ColorTyme was the support and the camaraderie, being involved with other dealers and sharing ideas,” Earle says. “It wasn’t really what ColorTyme was teaching me as much as it was what I was learning from other dealers.”

Earle wasn’t the only ColorTyme dealer who was eager to take the next step. Carlos Sardinia, the largest ColorTyme dealer at the time, had previously broken off from ColorTyme to launch his own licensing organization, Premier Rent-To-Own. When Earle got word of Premier, the concept energized him so much so that he left his stores for seven months to move to Boca Raton, FL, and help Sardinia get Premier off the ground. Shortly afterward, several other dealers left ColorTyme and joined Premier, quickly growing the organization to 48 stores in 11 states. Eventually, though, Earle returned home to run his stores and when Sardinia opted to sell his stores to the growing public companies, the other dealers came to Earle and said, “ ‘Troop, you were instrumental in getting us to join and now Carlos is selling out. You can’t just leave us high and dry,’” says Earle. “So I acquired the licensing organization, changed the name to Premier Rental- Purchase and did my best to support the dealers while still running my stores.

“Then we began to get calls from talented RTO professionals saying, ‘Hey, can you help me start up my business?’” Earle says. “I was struggling, honestly, to figure out how to help the dealers and help myself, because running stores takes a lot of energy and helping others takes a lot of energy, too. So, in 2001, I finally sold my stores and started to focus solely on licensing.” Filling the void Earle saw a void caused by over-consolidation within the RTO industry and recognized the potential opportunity to help seasoned rental-purchase veterans open up their own stores. “Since Premier was formed by a group of seasoned RTO operators coming together, the founding principles of Premier weren’t designed around what’s best for the licensor, they were designed around how best to serve us—the licensees,” says Earle. “The basic principles were: One—the fee we agreed to pay was going to be only the amount required to keep the basic overhead and provide the support we wanted from the licensing company and;

Two—the licensor shouldn’t go spend a lot of money or hire a bunch of VPs to tell us how to run our business. We knew how to rent and collect; we just wanted the licensing company to provide support in areas where it would be cheaper and smarter if we all worked together.” Support—the ultimate, comprehensive, 24/7 kind—is exactly what Trooper Earle works to provide to Premier’s licensees. From complete confidentiality during their first inquiring call to the development of their 10-year business strategy, Earle makes sure he can meet any and all new-dealer needs. And where Premier applicants commonly need the most help is where Earle provides the greatest support: financing. A unique financial arrangement “Banks don’t typically want to loan money to our industry,” Earle says, “because we use money the banks loan us to buy merchandise to put on rental agreements with customers who, much of the time, the bank wouldn’t give a checking account to. So, for the bank it doesn’t make sense to give us hundreds and hundreds of thousands of dollars so we can do business with consumers the bank doesn’t feel are credit-worthy.”

Over the past few years, Earle has developed a unique and amazingly effective system for securing financing for folks who want to open up their own Premier stores. It begins with an exclusive projection model originally designed by his brother, Chip. “He helped me develop the beginnings of a projection model where you plug in real numbers and it can project in tangible numbers what you’ll do for the next three years,” says Earle. “Premier’s projection model is simple to use and makes it easy for RTO professionals to convert their operational knowledge into accounting spreadsheets the banks need to see. It starts with about 240 questions and within about an hour and a half, it will produce the beginning of a projection custom-tailored to new dealers and to them specifically.Not only a cash flow and profit analysis, but everything needed to go to the bank including BOR and revenue projections, expenses, balance sheets, debt service schedules and more.” “With Premier’s help, we have been successful in getting most applicants 80 percent of their necessary funding from a local bank and the shareholders must come up with the other 20 percent on their own,” he says.

Once the projections are done, Earle sends them to Premier’s financial consultant, CPA Dan Whitsell (www.whitsellandcompany. com), a renowned rent-to-own industry specialist, for his review and consultation.Whitsell interviews applicants extensively, validating their projections based on their experience and track record, challenging financial vulnerabilities and examining their personal finances and credit. Once applicants have cleared Whitsell’s fiscal analysis, Premier develops a full-fledged plan for applicants to present to their financing source, which is usually a bank. Premier frequently pursues Small Business Administration guaranteed loans for prospective dealers. “SBA loans are notoriously difficult to get,” Earle says. “It took us a year-and-a-half of research and now we can successfully bridge the gap between the person who wants the SBA loan and all the reasons why he can’t get one. We can get SBA loans for people who probably never thought they could own a business.

One guy came to us with no money—none. And today, he’s in business with two store locations. If someone is short on his 20 percent, we won’t turn them away.We work with him on a variety of options from helping him get backing from family and friends he may know to turning him to financial supporters we know. If someone is good at renting and collecting and has the personal drive to own their own RTO company, we can help him. Mike Lewis of Mishawaka, IN, a former Rent-A-Center regional director, came to Premier wanting to start his own RTO company. When he tried to secure an SBA guaranteed loan, he was informed that rent-to-own businesses weren’t eligible for such loans; apparently, the SBA in Indiana had categorized RTOs as financing businesses, which are automatically ineligible. Earle was determined to resolve the situation. He flew to Indianapolis and sat down with the director of the state’s SBA office, explaining Premier and the rental-purchase industry to him.

Following two months of back-and-forth between the SBA and Premier, the Indiana office overturned its decade-old position on rent-to-own businesses and Lewis’ store became the first rent-to-own business backed by Indiana’s SBA in at least 10 years. It’s that sort of dogged determination and dedication to dealers that is helping spread the word about Earle and Premier. Today, Premier has 18 locations open in 10 states, reaching from California to Connecticut. Twelve of those have opened up within the past two years. Additionally, at publication, two more stores were preparing to open and nine more are slated to open in the first half of 2005. Earle’s not shy about sharing his plans for the future of the company; he intends to keep on growing. “I see no reason why we can’t continue to help 10 new dealers a year,” he says.

“If we can do that for just four or five years, then our dealer size will rival our franchise competitors. “The difference between Premier and our franchise competitors is they are stuck on qualifying people with money who want to invest in the rent-to-own business.” says Earle. “We, on the other hand, see tremendous financial opportunity helping seasoned RTO operators who have a proven track record of success in the industry become business owners.” Creating new ventures Earle is also working to integrate new, optional product lines for Premier dealers. In addition to the company’s electronics and appliances offerings, Earle recently launched Premier Home Furnishings (www.premierfurnishings. us) and Premier Wheels & Tires (www.premierwheels. net). In 2005, he plans to debut another new company division, Premier Cash Advance, and he is currently looking for financial backing to open a companyowned store division. Meanwhile, he’s pursuing franchise status for Premier, which should be complete this month.

“By converting our legal status to a franchise organization, it will put us on a solid infrastructure for future growth and further simplify our review process with the SBA”. For Earle, building a big company has been a dream for a long time. But talk with him and a few of his colleagues, and it becomes clear money isn’t his motivation—not right now, anyway. What drives Earle is the connections. “I love the hustle and bustle of this business,” Earle says. “When you work in rent-to-own, there’s always something happening. It’s just a constant interaction with customers and employees.

It’s service-oriented and if you don’t love to serve, then you should choose another business.” Earle thrives on connecting with others who love RTO the way he does. So helping other seasoned industry veterans within the context of an organization is definitive work for him. “Premier’s competitive advantage is our dealers,” says Earle. “The people at the stores are always the No. 1 reason why rent-to-owns succeed or fail. The people who are calling us are oftentimes the most recognizable RTO face within their community. So if they quit working for their company and if we help them open up a store down the street, their customers will flock to them because they’ve already got a reputation and a rapport with their customers.

Customers are why RTO stores are successful, not the sign above the door.” Strength in APRO Earle’s strong belief in the power of connection is also the reason why he requires Premier dealers to be members of the Association of Progressive Rental Organizations. Earle has been an APRO member for about a decade now. “I tell my people all the wonderful things APRO does and the host of things APRO can do for them. If you’re a member with us, then you’re a member with APRO. Under our licensing agreement, Premier dealers must remain APRO members in good standing. “I think there’s immense value in belonging to an organization that’s sharing ideas,” continues Earle.

“The information APRO shares gets you out of your box, seeing what other people are doing. Without that type of information, you’re just not as good as you could be.” Earle also appreciates the role APRO has played in improving the image of the rentalpurchase industry. “APRO’s leadership has been instrumental in helping the industry evolve over the past 15 years or so,” Earle says. “Rent-to-own is just considered a much more legitimate business. Our business practices, our collections, our appeal to the general consumer is 10 times better than it was 15 years ago and I think APRO gets the credit for all that.” It makes perfect sense that a man like Earle is concerned about the legitimacy of his industry; during conversations with he and his colleagues, the one word that consistently pops up time and time again is integrity.

“I’ve had my ups and downs, and the one thing that’s guided me is integrity, honesty,” reveals Earle. “I’ve always tried my best to do the right thing,which has at times costs me a lot of money. But now, I look back and I’m so glad I paid the money. It was painful, I could have walked away, but I didn’t.And now I can walk in holding my head up high and say, ‘That was a bad situation.We lost money, you lost money, but I did what was right.’ In this industry, you face a lot of tough situations,where if you do the right thing, then it’s hard in the short-term, but it’s going to be beneficial to you in the long run. In this industry, I think integrity is key.” “He’s a man with great integrity in a world without it,” says his longtime collaborator, Dan Whitsell. “He does the right thing no matter what. [The author] Louis L’Amour has a phrase— ‘A man to ride the river with.’ That’s Trooper.”

No doubt Earle’s wife of 14 years, Shelley, agrees. Trooper Earle, is also a committed husband to her and father to their two daughters—Kaleigh, 12, and Marina, 19 months. Trooper and Shelley, who is self-employed as an interior designer, weave their work and family lives together masterfully. In addition to Kaleigh’s typical preteen activities— Girl Scouts, drama, cheerleading, swimming, volleyball— the family unfailingly attends UVA football games throughout the autumn and vacations among North Carolina’s Outer Banks, in conjunction with Earle’s annual business retreat. Simply put, Earle has a passion for Premier—and for people. While he hopes his dealer-centered company continues to flourish—enough to give the industry’s “big dogs” a run for their money—what he concentrates on day-to-day is contributing whatever and however he can to the success of others. “It’s about the people who are calling me and they’re managers or market managers for rent-to-own companies who want an opportunity to go to the next level,” Earle says. “To help somebody get there is just a tremendous joy. We’re changing people’s lives, we’re changing their kids’ lives. That’s important. It’s important to me.

The Future of Plastic Transactions

by Julie Sherrier

Rental dealers, wake up! The age of plastic transactions is upon us. If you and/or your stores are not currently wired to accept credit, debit, ATM and/or cash cards, you are not only losing out on offering flexible payment options for your customers, but also may be losing out a very profitable opportunity to boost your bottom line. Check out these facts: In 1980, 56 percent of American adults carried around at least one credit card in the their wallets. By 2000, that figure surged to 76 percent, according to U.S. News and World Report. Add to that figure the boom of debit cards, which accounted for 26 percent of in-store (not just rental store) transactions, compared with 21 percent for credit cards in 2001.

That was the first year that credit card use fell behind debit cards. The future of plastic transactions cannot be ignored. McDonald’s has taken the broad step of accepting plastic for fast-food purchases and so have many rent-to-own dealers. However, there are plenty of dealers out there who remain steadfast in their opposition to adding debit/ATM or credit card card transactions as acceptable payment methods for RTO agreements for several reasons, including the costs involved. Yet, more and more dealers are finding that there are some true benefits to accepting plastic transactions and that the minimal fees involved do not outweigh the convenience for customers and the instantaneous payments.

Historically, the RTO business was a cashonly transaction. Then dealers started accepting checks, which brought along its own set of headaches in the form of insufficient funds, forgery and check-floating issues. In fact, as many rental dealers know, check-writing problems and schemes got so bad that the late Ernie Talley of Rent-A-Center decided several years ago that his stores would no longer accept checks—but Rent-A-Center stores do accept credit and debit cards as well as cash and money orders.

REVENUE FOR THE TAKING

According to UHR Rents’ Ernie Lewallen, 95 percent of all his nightly deposits were made in cash or money orders back in 1981. Today, Lewallen estimates that 15 percent to 20 percent of his daily receipts are being paid in some electronic form. “Our stores are seeing quite an uptick in our customers using ATM or debit cards when making payments,” says Lewallen. “And the transaction is instant. The money is transferred into our bank accounts immediately. The fees involved are minimal compared to the convenience of the service.”

Convenience is the key word here—and flexibility. The cornerstone of the RTO transaction has always been taking care of customers by offering convenient and flexible arrangements so that they can obtain the products they need for their homes. “The true value of the RTO transaction is being flexible and that includes offering a variety of payment options,” says Kevin Quinn of Quality Rentals, based in Tacoma, WA. Quinn says that at least 25 percent of his stores’ revenues are made with plastic. “My metropolitan stores in mid-sized cities have even posted 32 percent revenue from credit or debit transactions.” Visa check cards—the dominate player in debit cards in the United States—withdraw funds directly from a customer’s checking or savings account. Those funds are then instantly credited to a store’s bank account. More than half of all transactions processed by Visa during the first six months of 2003 were performed with Visa debit cards. More than 132 million cards were issued in that same six months by 8,700 financial institutions, generating 3.6 billion transactions totalling $134 billion in sales volume. And that’s just six months!

The average transaction amount is $37.49, according to Visa. Americans used VISA- and MasterCard-branded debit cards for more than $576 billion in purchases and cash advances, a 16 percent increase over the previous year. Since 1998, consumers have racked up more than $2 trillion in signature debit card transactions. “Today, most people can open some type of banking account somewhere,” says Lewallen. “All you need is some type of state identification.”

ARE YOU READY TO MAKE THE SWITCH?

Some RTO dealers just haven’t made the mental leap to plastic transactions, yet. “My customers don’t seem to be clamoring to make their payments via debit/ATM or credit cards just yet,” says Gary Romine of Show-Me Rent-To-Own in Farmington, MO. “If anything, debit cards would be something that we’d consider, but with our margins getting tighter, I can’t justify the upfront costs of installing the machines and then the fees for processing the transactions,” says Romine.

“However, I may be forced to make the change in the near future in terms of convenience, but right now, I don’t see the value-added benefit.” Credit card usage among RTO customers is certainly not unheard of, despite the fact that a large percentage of the RTO customer base has been described as low-income and non-banked. As Lewallen stated, all one needs is a valid state identification to obtain a bank account. And you probably don’t even need that to obtain a credit card. And to attract a wider variety of customers, offering flexible payment options opens the doors for growth rather than pigeon-holing the industry for one particular demographic group.

Jim Darou, account manager of Hometown Ventures, a one-store operation in Sault Sainte Marie, MI, says that his store has been accepting credit cards for four or five years now. He has, however, seen an increase in the usage of debit cards and says that he now processes more debit transactions than credit transactions. “Plastic transactions do account for quite a bit of our business, but the majority of our customers still pay in cash or with money orders,” says Darou. Hometown owner/operator Sidney Burton says he was skeptical at first about installing a credit card terminal in his store.

He just didn’t think it was going to be necessary, but after talking with several other small-town dealers at an APRO meeting, he changed his mind. “I’m just a one-store operator in a town with 16,000 people. I thought installing a terminal was big-city stuff, not for rural northern Michigan. I was proven wrong. While I didn’t have customers beating down my door asking me to take their credit cards, once we offered it I was surprised at how many people have taken advantage of it,” says Burton. Burton also says that having a credit card terminal really helps with his collections efforts, especially if his customers are traveling or can’t physically make it in to the store to make payments.

“A traveling customer will call us up and ask us to run the payment on their credit or debit account,” says Burton.“As a pol-icy, however, we don’t keep that information on file and don’t make charges automatically.” Today, between 20 percent and 30 percent of Hometown’s transactions are made through the credit card terminal. “We have made the cost for the terminal back over and over.

We want to make it easy for our customers to keep their accounts active. It’s one more opportunity to keep the product in our customer’s homes. Any expense concerns that I had upfront has paid off in our collections efforts,” says Burton. Burton admits that at first the thought of his customers paying with credit cards would not be a good idea because if they didn’t pay their credit card bills, then his BOR would decrease due to a higher collection rate on unpaid accounts. “But there has been no hint of that kind of behavior among my customers at all. It has not become an issue that we have had to deal with,” he says. “After all, I can’t manage my customer’s money for them. We can help them figure out what works for them with our rental agreements, but if the credit is available to them and they are using it, it’s not up to me to decide whether or not they can use credit in my store. It’s just another payment option.”

Quinn of Quality Rentals couldn’t agree more. “We have accepted credit cards for 15 years,” he says. “We used to process them the old-fashioned way with the slide machine, but that only accounted for about 2 percent to 2.5 percent of our business. But as our business changed—we target higher-end, plastic-carrying, customers—offering that payment option was not optional. We have customers we never see after their initial visit. They just call in to renew their agreement via credit or debit. And the volume of plastic transactions increases every year. “We complain sometimes about not reaching as many customers out there as possible,” says Quinn.

“This is one more way to open the door a little more. I’ve had customers who originally came into our store with bad credit, but 10 years down the road they are creditworthy and still doing business with me. There are two kinds of shoppers: those who buy things based on price and those who buy things based on service.” Last year, Quinn says that his 16-store chain generated more than $4 million in plastic transactions. “If it costs me 2 percent to get that revenue, then it’s worth it,” he says.

Security Interests, RTO Agreements and Consumer Bankruptcies

by Ed Winn III

An issue that has plagued commercial law—at least as often and probably as painfully as it has the RTO industry—is the lease/sale distinction. Since the industrial revolution, merchants have entered into “leases” with other merchants for equipment, vehicles and real estate, to which arrangement the lessee agreed. The lessees were later to learn long after the fact that the transaction was deemed to be really a “sale” and that the rights and obligations of the parties were far different from those contemplated when the agreement was originally struck. Over the years, there have been hundreds of lawsuits where this was the issue. The law being scrutinized was Article 9 of the Uniform Commercial Code that deals with secured transactions.

Rental dealers enter into secured transactions in their businesses often enough. They are debtors and the banks and merchandise vendors are the secured parties who reserve security interests in the property being sold in the case of vendors, bank accounts and rental agreements in the case of banks. Article 9 established rules for creating and perfecting security interests and what happens when a debtor defaults. An important element of Article 9 is the definition of a security interest, which actually appears in Article 1 of the UCC (Section 1-201(37)), along with a host of other commercial law definitions. During the 1990s, the definition of security interest was amended in every state, in part because there was so much litigation and uncertainty over the interpretation of this term. The older definition placed a great deal of emphasis on “the intent of the parties.”

Having to define a party’s intent has proven a difficult thing to do with any consistency and the result was that courts came down on every side of the issue, creating numerous multi-prong tests for determining intent and generally confusing the marketplace and arguably impeded commerce with the confusion. The commercial world depends upon predictability in the law. Finally, after some years of virtual legal chaos, those who are paid to contemplate these kinds of things—in this case the National Conference of Commissioners of Uniform State Laws. The NCCUSL offered an amendment to the definition of security interest that was intended to draw a brighterline distinction between leases and sales and to remove the element of a party’s intent from the courts interpretation of the issue so as to make outcomes more predictable. The RTO industry would have been in the middle of this fray if, during this same period, there had not been enacted all of the state consumer rental-purchase statutes under which rental dealers operate today.

These statutes, however, are irrelevant to commercial law issues. The new definition of security interest does clarify the lease/sale distinction and does so in a way that favors RTO dealers, especially in bankruptcy court. Bankruptcy judges are instructed by the Bankruptcy Code to interpret contracts according to state law, usually the state where the bankruptcy was filed and where the debtor lives. Debtor’s lawyers used to encourage bankruptcy judges to look at the definition of security interest when interpreting an RTO agreement because it was easy enough to prove that the customer, at least, intended to use the transaction to obtain ownership and not just to use the property short-term. (The rental customer/debtor testifies under oath that he intended to rent long enough to own.)

This argument persuaded several bankruptcy courts with pro-consumer judges to ignore the rental-purchase statute and to rely on the UCC when ruling against rental companies. With the advent of the new definition of security interest, requiring as a threshold for a lease to qualify as a security interest, that “the consideration the lessee is to pay the lessor for the right to possession and use of the goods is an obligation for the term of the lease not subject to termination by the lessee…”

Other requirements under the new definition concern the economic realities of any purchase options that may exist and will not affect the characterization of RTO transactions, since those transactions fall out of the security interest definition due to the no-obligation feature and the consumer’s right to terminate unilaterally at any time. A Virginia bankruptcy judge most recently employed this new definition. The judge noted that the law in his state had changed in 2001 and that a previous 1998 RTO bankruptcy case in which the court ruled against the rental company was no longer good law in the state. According to the judge in this latest opinion, RTO transactions are true leases, now, in Virginia.

That leaves South Carolina, the southern district of Texas and a couple of other specific bankruptcy judges in Idaho, Kentucky and Nebraska as jurisdictions with rulings that RTO transactions are secured transactions. The industry will, doubtlessly, in due course, challenge these few remaining court rulings and show how the new definition of security interest requires a holding that RTO transactions are true leases for bankruptcy purposes. All of the cases referenced in this article, plus all other RTO bankruptcy cases are being compiled as part of the revised APRO Bankruptcy Manual, 2005, which will be available to APRO members free of charge later in the spring.