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By George A. Parker
According to the Equipment Leasing Association (“ELA”), U.S. businesses lease
every thing from laptop computers to commercial airplanes, racking up more
than $ 200 billion in equipment leased each year. Although four out of five U.
S. companies use leasing to acquire equipment, many don’t know the ins and
outs of leasing well enough to negotiate a good deal. By focusing on a few
key aspects of the lease transaction, you can save a bundle on your next
lease and eliminate potential aggravation.
1. Choose the Right Leasing Partner
The starting point for saving money on your lease is to select the right
leasing company. The biggest savings in this area come from saving time and
dodging substandard lease transactions. The wrong lessor choice can result in
a slow approval, inability of the lessor to deliver, hidden fees, a poorly
designed lease transaction or worst. Give this aspect of obtaining a lease
your highest priority. To save a bundle on your next lease, you must do your
homework in pre-qualifying bidding leasing companies. Look for lessors with:
1) experience and knowledge; 2) good reputations; 3) the ability to perform;
4) helpful business contacts; and 6) a relationship approach. Ask for and get
lessor financial information, background information on the key managers, a
listing of recently completed leases, and contacts at key funding sources for
each leasing company being considered. Review this information and follow up
with all contacts provided.
2. Choose the Right Lease
You can rake in big savings by obtaining the right lease for the equipment you
are acquiring. When planning your lease financing, determine the top three or
four attributes your lease should have. During this process, carefully
evaluate the importance of: lease pricing, lease flexibility, balance sheet
considerations, equipment obsolescence, the anticipated period of equipment
usage, and your firm’s credit status. The wrong lease choice can be costly.
Lease pricing is market driven, so get at least three lease bids. Carefully
evaluate bids by doing a comparative analysis of discounted cash flows
incorporating all anticipated costs and fees. Make sure 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. Look for an arrangement that
will cover equipment needs for at least the next six to twelve months.
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.
Know your firm’s credit standing. If your firm has been in business for a
number of years, is profitable, has a good track record and has a strong
balance sheet, it deserves great lease pricing and terms. If your firm has a
spotty credit record or weak balance sheet, the challenge is to get the best
deal possible. Identify and offer credit enhancements that will make your
transaction more attractive. Allow plenty of time to get through the credit
review and due diligence process.
3. Ask for Fair Market Value ‘Caps’
If you decide that a fair market value lease is the way to go, you can realize
big savings by limiting that value. Fair market value rental and purchase
options at the end of the lease allow the lessee to either continue leasing
the equipment or to buy the equipment at the then fair market value. These
values are generally quoted by the lessor at lease end based on aftermarket
data, but most leases allow the lessee to obtain an appraisal from a
qualified equipment appraiser. To realize significant savings and to
eliminate unpleasant surprises, request fair market value options that are
“capped” (have upper limits). Beware, however. Lessors may insist on fair
market value ‘floors’ (lower limits) when they agree 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 hefty unintended lease charges, seek notice and automatic renewal
periods that are short. The primary purpose of the end-of-lease notice period
is to allow the leasing company sufficient time to redeploy the equipment if
you elect to return the equipment. The secondary purpose is to notify 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, with three
months being typical. If you violate the notice period, the lease kicks into
an often unfavorable automatic renewal period, usually one to six months. If
the lessor is unwilling to negotiate this provision, you can save money by
making sure the notice requirement is fulfilled within the allowed time.
5. Slash Interim Rent
You can slash lease costs significantly by limiting interim rent. Interim rent
is the rent you pay for daily use of equipment between the equipment
acceptance and lease start dates. The rationale for interim rent is that you
have use of the equipment and the lessor is obligated to pay the equipment
vendor during this period. While the rationale is not unreasonable, interim
rent can balloon lease pricing by arbitrarily extending the term of the lease
(albeit by only days). The best approach is to schedule equipment delivery
and acceptance toward the end of the month. Most lease terms officially start
the first day of the month following equipment acceptance. Another strategy
is to negotiate a truncated period at the end of the lease such that the
interim period and truncated period total one month of the quoted lease term.
A last strategy is to request a limit on interim rent (perhaps ten or fifteen
days) regardless of equipment acceptance.
6. Manage Equipment Returns
Save a bundle on your lease by managing the equipment’s return. Although you
may not anticipate returning the equipment to the leasing company at lease
end, it can be costly if you do. When equipment is returned, most lessors
care about and will hold your firm accountable for the equipment’s condition.
Equipment should be properly maintained and returned in good condition. Make
sure that you understand the return provision of the lease and that you have
good internal controls to adhere to these requirements. 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
The term of the lease should match the expected use of the equipment as
closely as possible to save money. If the term is too short, cash outlays for
the equipment might exceed the expected equipment benefits over the term. If
the lease term is too long, you might lose the flexibility of upgrading to
newer more desirable equipment. Notwithstanding your preferences, the term
allowed by the leasing company may depend on their perception of credit risk
and the expected economic life of the equipment. Any mismatch between your
preference and lessor’s can be managed by obtaining favorable end-of-lease
options.
8. Identify and Understand All Potential Fees
Leasing proposals vary in the types and amounts of fees and penalty charges.
Common fees and charges 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. These are only a few of the possible fees and charges.
You can save a bundle by carefully going through each lease proposal and
lease agreement to identify and compare likely charges. If fees or charges
are significant and likely, they should be incorporated into your pricing
analysis. Where possible, especially where one proposal contains fees/charges
excluded from the other proposals, try to negotiate these fees/charges.
9. Offer Credit Enhancement to Reduce Lease Rates
In some cases, you can trim lease pricing substantially by offering credit
enhancements to improve your firm’s credit profile. Enhancements can include:
shortening the lease term, cash or other assets as additional collateral,
personal or corporate guarantees, advance rentals payments, and security
deposits. Since most credit enhancements involve giving up something of
value, do a cost/benefit analysis to determine whether the net benefit is in
your favor. If your firm has assets that are not working for it why not put
them to work in the leasing arrangement. The value of credit enhancements can
differ from lessor to lessor, so identify and discuss possible enhancements
upfront. Try to assess whether your firm’s credit will improve significantly
by credit enhancements and get lessors’ pricing with and without the credit
enhancements.
10. Request Several End-of-lease Options
If the lease contains a nominal purchase option, there is little need for
additional end-of-lease flexibility. Otherwise, flexible end-of-lease options
can save you a bundle by preventing you from incurring extra expense. One of
the most cost-effective options is the ability to return the equipment at the
end of the lease. If you no longer need the equipment, why incur additional
charges? Additionally you should have the ability to purchase the equipment
at a fair or reduced price and the right to continue leasing the equipment at
a fair or reduced rent. As discussed, use of caps in fair market value
purchase or rental options can greatly reduce potential costs at lease end.
Conclusion
Saving a bundle on your next lease is a cinch if you know where to look. By
focusing on a few key areas, you can wring huge savings out of your lease.
Remember to set your priorities in evaluating lease proposals and to choose
the right leasing partner. Also, while front-end lease pricing is usually a
high priority, evaluate each lease carefully to sniff out hidden fees and
expenses. Don’t be bashful about negotiating points in the lease that have
the potential to save you a bundle.
George Parker is a Director and Executive Vice President of Leasing
Technologies International, Inc. (“LTI”). Headquartered in Wilton, CT, LTI is
a leasing firm specializing nationally in equipment financing programs for
emerging growth and later-stage, venture capital backed companies. More
information about LTI is available at: www.ltileasing.com.
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