Equipment Leasing - Things to Know

How to Select a Leasing Partner

1. Choose the Right Leasing Partner

First you have to be careful about the leasing company that you are looking for. If it is an accurate choice that must be the biggest money saving in your business and also you can escape from the poor lease transactions. Wrong choice of the leasing company may lead to slow approval, inability of the lessor to deliver, hidden fees, a poorly designed lease transactions. If you are looking for a leasing company, you should look for the following things: 1) experience and knowledge; 2) good reputations; 3) the ability to perform; 4) helpful business contacts; and 6) a relationship approach. Before taking a decision you must enquire about the financial information, recently completed leases and the funding sources of the leasing company.

2. Choose the Right Lease

If the lease for your equipment is the right one, then you will get more savings.  When you are planning for a lease, you carefully weigh up the importance of: lease pricing, lease flexibility, balance sheet considerations, equipment obsolescence, the anticipated period of equipment usage, and your firm's credit status .you should compare two or three top lease bids in the market for discounted cash flows incorporating all anticipated costs and fees. You have to make sure that your lease has favorable end-of-lease options, a reasonable end-of-lease notice period, the ability to relocate equipment by notifying the lessor, the right to terminate the lease early without an onerous charge, and the right to assign the lease to another user under agreed upon conditions.

Big savings can be realized by knowing when to select a lease with a bargain purchase option versus a fair market value option. If you know you will be keeping the equipment beyond the initial lease term, a bargain purchase option is usually the most cost-effective alternative. If the equipment is prone to obsolescence or if it is unlikely you will retain the equipment at the end of the lease, consider a lease with fair market value, end-of-lease options. If your company is in good profitable condition and has a good track record, you can go for a big lease pricing and terms.



3. Ask for Fair Market Value `Caps'

If the fair market value lease is the way ahead in front of you, you can take in big savings by limiting that value. At the end of the lease you can either continue with the lease or you can buy the equipment in fair market value. This value will be set by the lessor according to the after market value at the end of the lease. For better savings you can ask for the fair market value that are capped(which have upper limits) when  the lessor is going to `caps' , the availability of a fair market value cap will depend on the size of the transaction (may not be available on small transactions), competition among lessors, and the credit status of your firm.

4. Keep the End-of-lease Notice and Renewal Periods Short

To avoid big unexpected lease charges, ask notice and automatic renewal periods that are short. The first step is at the end-of-lease notice period, if you want to return the equipment back, and then give the leasing company sufficient time to dispatch the equipment. The second point is to inform the lessor of your plan to either continue leasing the equipment or to purchase it. The notice period generally ranges from one to six months,. If you are violating the conditions of the lessor within this notice period, the lease will kicks into an often poor automatic renewal period, usually one to six months.

5. Slash Interim Rent

The lease costs can be reduced by limiting the interim rent. Interim rent is the rent you pay for daily use of equipment between the equipment acceptance and lease start dates. The motivation for interim rent is that you have use of the equipment and the lessor is forced to pay the equipment vendor during this period. The best option is you choose the equipment delivery at the end of the month, and then you can start lease terms officially on the first day of the next month.

6. Manage Equipment Returns

At the end of the lease you should have to return the equipment.  When equipment is returned, most lessors care will be careful about the condition of the equipment. Equipment should be properly maintained and returned in good condition. If the lease contains an `all or none' return provision, one strategy is to subdivide the lease into several smaller lease schedules on the front end. Place equipment you are most likely to keep on the same schedules. Try to negotiate the right to return up to 20% of the equipment (based on original value) at the end of the lease, as long as you agree to renew the lease or purchase the balance of the equipment. Track and save all equipment accessories and documentation.

7. Match Lease Term with Projected Equipment Use

If your lease term is too short, the cash return for the equipment will exceed the expected benefit. But if the lease term is too long , you can not keep the flexibility of the equipment fine . So the term of the lease should match the expected use of the equipment as closely as possible to save money. in spite of giving preferences to you, the leasing company may depend on their view of credit risk and the estimated economic life of the equipment.



8. Identify and Understand All Potential Fees

Common fees and charges in the leasing proposals include: commitment fees; non-use fees or facility fees; per schedule documentation charges; attorney fees; UCC financing statements; penalty charges for late rental payments; and early lease termination charges. You can definitely save some money by carefully listen to each lease proposal and lease agreement to identify and compare likely charges. If there is any fee or charges are considerable, they should be included into your pricing analysis. Please try to negotiate all such fees/charges.

9. Offer Credit Enhancement to Reduce Lease Rates

In some cases, you can trim lease pricing to a large extent by offering credit enhancements to improve your firm's credit profile. Credit Enhancement is the unconditional, final guarantee of income flows and counterparty risk. Enhancements can include: shortening the lease term, cash or other assets as additional collateral, personal or corporate guarantees, advance rentals payments, and security deposits. The value of credit enhancements can differ from lessor to lessor, so you have to identify and discuss possible enhancements straight to the lessor.

10. Request Several End-of-lease Options
If your lease agreement contains a nominal purchase option, you need some extra end of lease flexibility. Otherwise, you will get some extra more expenses at the end of the lease. The cost effective option is you should return the equipment at the end of the lease. If you need to purchase that equipment after the lease you can buy it at the fair value price or you have the right to continue the lease with a less amount/rent. As discussed, use of caps in fair market value purchase or rental options can greatly reduce potential costs at lease end.