If you plan to keep equipment beyond term of lease, it is generally cheaper to enter into a bargain purchase/capital lease. During lease, you pay lessor a rate of return plus cost of equipment. At end of lease, you receive equipment title for a nominal payment. If equipment is subject to rapid obsolescence or if you feel confident that you will return equipment at end of lease, a FMV or operating lease might prove advantageous. What you are getting in a FMV or operating lease is flexibility to kick equipment out at lease end. Additionally, this form of lease can lower your lease rate as lessor passes a portion of anticipated residual value back to your firm in form of lower payments. If your firm has reason to minimize liabilities appearing on balance sheet, perhaps due to bank financial covenants, an operating lease might be appealing. In these lease situations, balance sheet concerns may trump desire to obtain lowest lease rate. In choosing a lease form, look at period of intended equipment use, potential for equipment obsolescence, balance sheet considerations, income tax considerations and any other factors that might influence lease choice.

Failing to Evaluate Vendor Service - Equipment Lease Arrangements

Entering into a ‘hell or high water’ equipment lease involving proprietary equipment required for a multi-year service (such as alternative energy or telephone services) can lead your firm into a situation ripe for blunder. Even under best of circumstances, a ‘hell or high water’ equipment lease (one requiring non-cancelable payments) entered into in connection with a service arrangement carries a certain degree of risk. In many cases, lease is provided by a leasing company independent from service provider or later sold by service provider to a lessor. The potential pitfall results from possibility that your company might get stuck making lease payments for equipment it can no longer use, should service provider fail or cease to offer service. The best protection against this potential pitfall is to avoid these types of arrangements. If you must enter into such an arrangement, make sure service provider is financially sound, reputable, and has a long track record of providing excellent service. Also, since these transactions always carry some risk, make sure that an abrupt interruption in service will not have a material negative impact on your company or cause financial hardship.

Ignoring End-of-lease Notice Deadline

While not a deadly blunder, failing to give timely notice at end of your lease can create significant additional lease expense for your firm if you plan to return equipment. Many leases have provisions that require lessee to notify lessor of lessee’s decision to return equipment at end of lease. If you violate notice period, lease kicks into an often unfavorable automatic renewal period, usually one to six months. If you intend to return equipment at lease end, make sure your firm gives notice on time. It can save your firm a bundle in avoidable lease expense.

Underestimating Time Required to Close Lease

Not allowing enough time to go through lease planning, proposal, approval and documentation phases can result in extra cost. A rushed process can lead to poor lessor selection, approval delays, documentation miscues or poorly negotiated lease terms. Except in small ticket transactions (under $ 75,000 to $ 100,000) where personal guarantees of principals are involved, most lease transactions take at least three weeks or more to close. While some of time is consumed in bidding and credit review processes, much of it can be eaten up by administrative matters. Obtaining insurance certificates, filing UCC financing statements, reviewing and negotiating lease agreement, all contribute to time it takes to get to a lease closing. The best way to manage lease closing process and to save precious time and money is to plan ahead. Make sure you establish criteria for lease you are seeking, prepare a package containing information all bidders would want, obtain a lease closing list from each lease bidder, and respond to all requests/questions raised by bidding lessors on a timely basis.

While equipment leasing pitfalls can not always be avoided, you can take steps to prevent snags that can cost your firm a mint. Plan ahead and do your homework before launching lease bidding process. Give high priority to selecting an experienced lease provider with high integrity and good expertise. Also, with lease transactions that represent significant obligations for your firm, engage a competent attorney to help you review and negotiate equipment lease.

If you can’t determine likely duration of default, you should request a relatively short period of lower payments until you can better evaluated situation. Be prepared to negotiate length of period, amount of reduced payments and credit enhancements.

If default looks hopelessly incurable, you may proceed in number of ways. You can: 1) offer to return equipment to lessor and pay lease balance over an extended time; 2) offer to find a suitable sublease arrangement for equipment; or 3) see whether lessor will allow you to keep equipment and make reduced payments on a month to month basis until you or lessor can re-market equipment. If all else fails in working out an acceptable solution with lessor, it may be time for you to get a skilled attorney involved.

If you are able to reach a mutually acceptable solution, some lessors might require a formal forbearance agreement covering new understanding. These agreements can take form of an informal letter of understanding or an extensive legal agreement. The agreement form may depend on size of transaction and preference of lessor. Most lessors ultimately expect to be compensated for forbearing via a one-time forbearance charge, penalty rental payments or other means. Also, expect to reimburse lessor for any legal expenses incurred to document a forbearance arrangement.

Most lessors don’t want to take legal action or cause customers hardships that will interfere with recovering their lease investment. This preference is weighted against prospect of realizing a larger eventual loss by allowing customer to retain equipment. It is usually more advantageous for lessors to work with customers if situation seems salvageable. The less desirable alternative is to go through an expensive and lengthy legal process to foreclose on lease and attempt to repossess equipment. Many large lessors have individuals in-house that specialize in managing ‘work out’ transactions. These specialists usually have had experience with many lessee payment defaults. Their mandate is to get quickest recapture of lease investment possible, subject to protecting investment. If it becomes clear at any time that lessor plans to take legal action against your firm rather than try to work with you to realize a mutually acceptable solution, get a skilled attorney involved. The attorney can provide you with your legal alternatives and may be able to assist you in negotiating with lessor.

When your company’s fortunes take a turn for worst and you have to modify payment terms with your leasing company and other creditors, don’t panic. This is time to redouble your efforts and to draw up plans to remedy situation. Early aggressive actions by you to develop solutions will pay great dividends. Make every effort to create and propose plans mutually acceptable to all parties. However, always be prepared seek legal help should grim reapers or Dementors show up at your door.