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6. Manage Equipment Returns
Save a bundle on your lease by managing equipment’s return. Although you may not anticipate returning equipment to 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 equipment’s condition. Equipment should be properly maintained and returned in good condition. Make sure that you understand return provision of lease and that you have good internal controls to adhere to these requirements. If lease contains an ‘all or none’ return provision, one strategy is to subdivide lease into several smaller lease schedules on front end. Place equipment you are most likely to keep on same schedules. Try to negotiate right to return up to 20% of equipment (based on original value) at end of lease, as long as you agree to renew lease or purchase balance of equipment. Track and save all equipment accessories and documentation.
7. Match Lease Term with Projected Equipment Use
The term of lease should match expected use of equipment as closely as possible to save money. If term is too short, cash outlays for equipment might exceed expected equipment benefits over term. If lease term is too long, you might lose flexibility of upgrading to newer more desirable equipment. Notwithstanding your preferences, term allowed by leasing company may depend on their perception of credit risk and expected economic life of 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 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 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 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 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 net benefit is in your favor. If your firm has assets that are not working for it why not put them to work in 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 credit enhancements.
10. Request Several End-of-lease Options
If 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 most cost-effective options is ability to return equipment at end of lease. If you no longer need equipment, why incur additional charges? Additionally you should have ability to purchase equipment at a fair or reduced price and right to continue leasing 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 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 lease that have 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.